Earthquake, drought, fire, economic famine, flood, and a pestilence of TV court reporters have caused an exodus from the City of Angels to Boulder, Colorado. The sudden increase in demand is straining the capacity of Boulder’s electrical system. Boulder’s alternatives have been reduced to buying 150,000 MWh of electric power from Tri-County G&T at a price of $75 per MWh, or refurbishing and recommissioning the abandoned Pearl Street Power Station in downtown Boulder. Fixed costs of that project are $10 million per year, and variable costs would be $35 per MWh. Should Boulder build or buy?

First, we need to find out what is the cost incurred by the company in building the power station and after that, we will compare that cost with the selling price of the power from Tri-county G&T. the lower-priced option will be considered as best option.

Cost incurred by the company in building the power station = $10,000,000 + (150,000 x $35)

Cost incurred by the company in building the power station = $10,000,000 + $5,250,000

Cost incurred by the company in building the power station = $15,250,000

Selling price of the power from Tri-county G&T = 150,000 x $75

Selling price of the power from Tri-county G&T = 11,250,000

Decision: It would be a wise option for the company to buy it. From buying the power the company will save $4m.