Mega Power estimates that the cost to decommission its nuclear power plant in today’s dollars is $500 million. This cost is expected to escalate at 5%... Accounting MCQs | Accounting MCQs

Mega Power estimates that the cost to decommission its nuclear power plant in today’s dollars is $500 million. This cost is expected to escalate at 5% per year over the life of the plant. Mega must collect a constant amount each year from customers over the remaining 20-year life of the plant and place the amounts in a fund that is expected to earn at a rate of 7% per year. The fund currently has a balance of $100 million. How much must Mega collect from customers each of the next 20 years to cover the decommissioning costs? Ignore income tax effects and round to millions.

$38 million.
$26 million.
$23 million.
$20 million.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (C) is correct. The first step is to determine the amount that will be needed in 20 years. If the $500
million increases by 5% annually, the amount needed in 20 years would be $1,326,500,000 ($500 million × 2.653). Since there is already $100 million available in the fund, that amount will grow at 7% annually for 20 years to equal $387 million. Subtracting the $387 million from $1,326,500,000 leaves $939,500,000 to be raised. Use a present value table to find the present value of 20 equal payments that will accumulate to $939,500,000 in 20 years at 7% interest. Dividing the $939,500,000 by the future value factor of 40.995 (20 years at 7%) equals $22,917,429 per year, or approximately $23 million.