Nuclear power plants are required to have full decommissioning costs accumulated during the useful life of the plant. The new nuclear plant at Darlington is designed for 60 years of operational life starting in 2025. OPG plans to set aside $1 million per month in a sinking fund for the operational of the plant. What is the value of the value of this sinking fund at the end of the plant life, if OPG expects an average rate of return of 2.5% compounded monthly?

Question

Quizplus · Accepted Answer

The value of the sinking fund at the end of the plant's life can be calculated using the future value of an annuity formula: $FV = P \times \frac{(1 + r)^n - 1}{r}$, where $P$ is the monthly payment, $r$ is the monthly interest rate, and $n$ is the total number of payments. Here, $P = $1,000,000$, $r = \frac{2.5\%}{12} = 0.00208333$, and $n = 60 \times 12 = 720$. Plugging these values into the formula gives a future value of approximately $1,668 million, which is option B.

Nuclear Power Plants Are Required to Have Full Decommissioning Costs