# Duke Energy has 14 coal sites throughout the state of North Carolina. Removing the coal ash from the sites has high costs today and provides possible future benefits. You are tasked with advising the governor of North Carolina on whether to require Duke Energy clean up all of its coal ash sites. The benefit of cleaning up the sites is the reduced risk of a potential spill and the costs associated with a spill.All numbers are in real dollars (inflation corrected) and are expressed in present value terms (no need to discount- this has been done for you). Here are the facts: Cost of cleaning up coal ash sites is \$30 million today. If the coal ash is not cleaned up a. There is a 10% chance the coal ash ponds flood and causes \$70 million dollars in damages. b. There is a 20% chances the coal ash seeps into the ground water causing \$100 million in damages. c. There is a 70% chance the coal ash sites cause no damage to the state of North Carolina. 1. What is the expected benefit of cleaning up the coal ash site (i.e. how much do we expect to avoid in future damages)? 2. What sort of analysis would you undertake to advise the governor? Would you recommend the governor require Duke clean up the coal ash sites? (no need to complete calculation, just write the formula used for decision making)?

1) expected benefits of cleaning up coal ash site is \$27 million

2) The expected benefits of cleaning the site are less than the costs of cleaning them (\$30 million cost > \$27 million benefits). But the problem is that the cleaning costs will be covered by Duke Energy today, but in the future, there is a risk that the costs will be covered by the state government. Companies are not eternal and even industry leaders like Kodak, Sears, Toys R Us, Radio Shack, GM, etc., have gone bankrupt. The difference between the costs and the benefits is not that large to risk the state government having to pay for the cleaning costs in the future.

Explanation:

Costs of cleaning coal ash \$30 million

Expected benefits form cleaning coal ash:

• \$70 million x 10% = \$7 million
• \$100 million x 20% = \$20 million
• \$0 x 70% = \$0
• total benefits = \$27 million

## Related Questions

Which of the following statements are inconsistent with the efficient market hypothesis?a. The average annual return on stocks is greater than zero. b. Stocks that outperform the index in March always underperform it in April. c. Half of fund managers are able to beat their relevant index each year, before fees. d. Stocks that outperform the index in March always outperform it in April.

b. Stocks that outperform the index in March always underperform it in April.

d. Stocks that outperform the index in March always outperform it in April.

Explanation:

The Efficient market hypothesis states that in an efficient market, all the available information in the market are reflected in the prices of the stocks being traded. As such, all stock are fairly priced.

Stocks that perform in a certain way in March and then in another way in April are violations of the hypothesis. This is because if indeed the market was efficient, the prices would adjust to reflect the different performances by month such that there would be no more fluctuations.

Miyagi Data, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/10, net 50. Based on experience, 80 percent of all customers will take the discount. a.What is the average collection period

a. Average collection period = 18 days

b. Average balance = \$1,717,112.33

Explanation:

b. If the company sells 1,240 forecasts every month at a price of \$2,340 each, what is its average balance sheet amount in accounts receivable?

a. Average collection period = 80%(10 days) + 20%(50 days)

Average collection period = 0.80(10 days) + 0.20(50 days)

Average collection period = 8 days +  10 days

Average collection period = 18 days

b. Average balance = 1240 * \$2,340 * 12*(18/365)

Average balance = 1240 * \$2,340 * 12 * 0.0493151

Average balance = 1717112.32992

Average balance = \$1,717,112.33

A Nike women's-only store in California offers women's running, training, and sportswear products and also contains an in-store fitness studio for group and personal fitness training sessions. The store consistently earns profits in excess of \$437,000 per year and is located on prime real estate in the center of town. The store owner pays \$18,000 per month in rent for the building. A real estate agent approached the owner and informed her that she could add \$7,700 per month to her firm's profits by renting out the portion of her store that she uses as a fitness studio. While the prospect of acquiring this rental income was enticing, the owner believed the use of that space as a fitness studio was an important contributor to her store's profits. What is the opportunity cost of continuing to operate the fitness studio within the store?

Opportunity Cost:

Opportunity cost can be denied as the benefit a person has received but giving up taking another course of action. In other words, it can be defined as the next best alternative.

Given that the Nike women's store earns a profit in excess of \$437,000. The owner of the store pays \$18,000 per month as rent. A real estate agent approached the owner and informed her that she could add \$7,700 per month to her firm's profits by renting out the portion of her store that she uses as a fitness studio.

From the given question the opportunity cost of continuing to operate the fitness studio within the store is \$7,700.

Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2009, is for a period of: A. Three months.
B. Four months.
C. Six months.
D. Seven months.

D. Seven months.

Explanation:

Bond is defined as a debt instrument that shows the indebtedness big the bond issuer to the bond holder. They are units of cooperates debt issued by companies and they are tradeable. For example corporate bond and municipal bonds.

When a bond is issued on June 1 , with repayment of October 1 and April 1. The interest expense by October will be for 4 months.

However as at December 31, 2009 the accrued interest that will be recognised will be for October to December (that is for 3 months). Though it has not been paid it will be recognised at the end of the accounting period.

This gives a total of 7 months interest expense.

Herman Company has three products in its ending inventory. Specific per unit data at the end of the year for each of the products are as follows: Product 1 Product 2 Product 3 Cost \$ 40 \$ 110 \$ 70 Selling price 100 180 130 Costs to sell 6 80 30

Given:

Product 1      Product 2         Product 3

Cost of product         \$20                 \$90                 \$50

Selling price              \$40                 \$120                \$70

Selling cost                \$6                    \$40                 \$10

Computation:

Product 1      Product 2         Product 3

Product Cost                         \$20                 \$90                 \$50

N.R.V                              (\$40-\$6)=\$34  (\$120-\$40)=\$80  (\$70-\$10)=\$60

Per Unit Inventory Value      \$20                 \$90                 \$50

Prepare adjusting entries for the following transactions. 1. Depreciation on equipment is \$1,340 for the accounting period.
2. Interest owed on a loan but not paid or recorded (accrual) is \$275.
3. There was no beginning balance of supplies and \$550 of office supplies were purchased during the period. At the end of the period \$100 of supplies were on hand.
4. Legal service revenues of \$4,000 were collected in advance. By year-end \$900 was still unearned.
5. Salaries incurred by year end but not yet paid or recorded amounted to \$900.

1. Debit Depreciation expense  \$1,340

Credit Accumulated depreciation  \$1,340

2. Debit Interest expense  \$275

Credit Accrued Interest  \$275

3. Debit Supplies expense  \$450

Credit Supplies Account  \$450

4. Debit Unearned Service revenue  \$3,100

Credit Service revenue  \$3,100

5. Debit Salaries expense  \$900

Credit Accrued Salaries  \$900

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,

Depreciation = (Cost - Salvage value)/Estimated useful life

It is recorded by debiting depreciation and crediting accumulated depreciation.

When interest is incurred as an expense but yet to be paid, it will be accrued for by Debiting Interest expense and crediting accrued Interest. The same applies to salaries incurred but yet to be paid.

When Supplies is purchased, Debit supplies and credit Cash/Accounts payable. As Supplies are used up, debit supplies expense (with the amount used) and Credit Supplies account.

Amount of supplies used up = \$550 - \$100

= \$450

When a fee is received in advance for a service yet to be rendered, the revenue for such fee is said to be unearned. The entries required are

Debit Cash account and Credit Unearned fees or deferred revenue.

As the service is performed and the revenue is earned, debit Unearned fees and credit revenue.

Earned revenue = \$4,000 - \$900

= \$3,100