You are a junior analyst for the Public Transport Authority's capital investment committee who are currently in talks to decide whether they will invest in a new Static Var Compensator (SVC) to attempt to counter rising costs imposed by Western Power for bad Power Factor. You managed to gather the below information from the initial meeting and have been given the task of determining whether or not this provides a sound investment
decision:
Total PTA urban rail network power consumption: 1,305,000W/Day (mean)
Western Power's Power Factor penalty rate: $4,000/MW
PTA Annual (Taxable) income: $18,000,000 (escalating by 2% each year).
Total estimated life of current network: 8 years.
Asset residual value: $2,000,000
Corporate Tax Rate: 30%
Annual Inflation Rate: 3%
Interest rate 6.5%
Maintenance cost of the SVC, $35,000/year
Total initial capital cost of SVC (Design, Construct, and Commission): $14,000,000.
(a) Does the SVC project present a sound business decision? (Assume MARR of: 6.5%), with the following constraints:
a. DDB (α:2)
b. Switchover method acceptable
c. All tax savings to be accumulated (realized) in the following year


• Full SVC problem, including depreciation on and tax implication.
• Ensure you can apply the 'switchover' method
• Calculate the IRR