Provides electrical service to rural customers

Reference no: EM133569386

Question 1.

The Tri-County Generation and Transmission Association is a nonprofit cooperative organization that provides electrical service to rural customers. Based on a faulty long-range demand forecast, Tri-County overbuilt its generation and distribution system. Tri-County now has much more capacity than it needs to serve its customers. Fixed costs, mostly debt service on investment in plant and equipment, are $82.5 million per year. Variable costs, mostly fossil fuel costs, are $25 per megawatt-hour (MWh, or million watts of power used for 1 hour). The new person in charge of demand forecasting prepared a short-range forecast for use in next year's budgeting process. That forecast calls for Tri-County customers to consume 1 million MWh of energy next year.

How much will Tri-County need to charge its customers per MWh to break even next year?

The Tri-County customers balk at that price and conserve electrical energy. Only 95 percent of forecasted demand materializes. What is the resulting surplus or loss for this nonprofit organization?

Question 2.

A manufacturing plant has reached full capacity. The company must build a second plant-either small or large-at a nearby location. The demand is likely to be high or low. The probability of low demand is 0.3. If demand is low, the large plant has a present value of $5 million and the small plant, a present value of $8 million. If demand is high, the large plant pays off with a present value of $18 million, and the small plant with a present value of only $10 million. However, the small plant can be expanded later if demand proves to be high for a present value of $14 million.

Draw a decision tree for this problem.

What should management do to achieve the highest expected payoff?

Reference no: EM133569386

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