Solar Development in South Carolina You have been approached by a developer with

Question

Solar Development in South Carolina

You have been approached by a developer with South Carolina solar project. Your manager wants to understand how attractive S.C. market could be or not the particular opportunity is feasible and meets the company’s investment criteria:

The Following part is the information regarding the project:

Investment Date: 2014

Commercial Operation Date: 2015

Life of Plant: 20 years (assume no terminal value)

Depreciation Assumptions: 5-year straight line depreciation (assume no salvage value)

Production per-year: 50,000 MWh

Price (you get for each MWh you deliver): $150/MWh (Price will be escalating at the rate of CPI)

CPI: 2.5%

Capital Expenditure: $40,000,000 (Cost of the Plant)

Operating Expenses: Operating expenses (COGS) are 25% of EBITDA for year 1 and escalating each year at CPI.

Investment Tax Credit: South Carolina provides 3% investment tax credit on the initial investment.

Taxes: 35%

Based on the information provided, please calculate the IRR and NPV based on the after-tax cash flows and discount rate is 8%. What is your assessment?

Explanation / Answer

IRR is when the initial investment = NPC

IRR is the rate at which the net present value of the cash flow is equal to the initial return. This can be calculated by the given formula:
0 = (investment) + CF1/ (1+IRR)^1+CF2/(1+IRR)^2+CFN/(1+IRR)^N

At 8.974 IRR the investment is equal to the net present value.

He should chose the project since have the positive NPV.

Year Production per year Cost per MWH Revenue COGS Gross Income Depreciation Earnings after Depreciation Tax Add Depreciation Net cash flow $(40,000,000) 1 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 8,000,000 $(2,375,000) $(3,575,000) $8,000,000 $   4,425,000 2 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 8,000,000 $(2,375,000) $(2,375,000) $8,000,000 $   5,625,000 3 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 8,000,000 $(2,375,000) $(2,375,000) $8,000,000 $   5,625,000 4 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 8,000,000 $(2,375,000) $(2,375,000) $8,000,000 $   5,625,000 5 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 8,000,000 $(2,375,000) $(2,375,000) $8,000,000 $   5,625,000 6 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 7 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 8 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 9 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 10 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 11 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 12 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 13 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 14 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 15 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 16 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 17 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 18 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 19 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250 20 50000 150 $7,500,000 $1,875,000 $   5,625,000 $ 5,625,000 $1,968,750 $ 3,656,250 $   3,656,250

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