Final answer:
The payback period for a nuclear power plant project is calculated by dividing the total initial investment by the annual cash flows minus the present value of the decommissioning cost. This calculation provides a basic understanding, but a more accurate assessment should utilize the net present value or discounted payback methods.
Step-by-step explanation:
The student is asking about the payback period for a nuclear power plant construction and operation project, considering construction costs, annual generated cash, decommissioning costs, and the cost of capital. The payback period is a financial metric used to determine the time required for an investment to generate cash flows to recover the initial investment cost.
To calculate the payback period, you would typically divide the initial investment by the annual cash inflows, but because there's a decommissioning cost at the end of the project, you would first need to subtract that cost from the total cash inflows before dividing the initial investment cost. However, since the decommissioning cost occurs at a future time, its present value at the 5% cost of capital should be considered. Assuming the firm uses straight-line depreciation, we could create a basic formula:
PB = Initial Investment / (Annual Cash Flow - PV of Decommissioning Cost)
However, this calculation does not consider the time value of money beyond the present value of the decommissioning cost, and in reality, more complex methods such as NPV or discounted payback period should be used for a more accurate calculation.