You have been approached by a developer with South Carolina solar project. Your
ID: 2779621 • Letter: Y
Question
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
Initial investment = $40,000,000 Tax=35% Depreciation = 40,000,000/5 years = 8000,000 salvage value = 0
Thus Initial outlay = fixed cost investment + change in working capital - tax credit from South Carolina
=40,000,000 - (0.03*40,000,000)
=40,000,000 - 1,200,000
=38,800,000
Terminal year after tax non operating cash flow = Salvage value + change in working capital - Tax(Salvage value - book value)
=0+0-0.35(0-0)
=0
Now after tax operating cashflow = (sales - cost)(1-T) + (T*Deprieciation)
so for only first five years out of total 20 years life we will get depreciation tax shield i.e. (T*Deprieciation)
and also the price of $150/MWh and COGS as percentage of EBITDA will increase by CPI of 2.5%
it states that COGS is 25% of EBITDA and thus if sales is 100 and COGS is 20, EBITDA would be 80 and this will make COSG 20/80 = 25% of EBITDA
thus we consider COSG as 20% of sales
Sales = production * price = 50000*150 = 7500,000
PLease see below the schedule cashflow for 20 years of the project below:
(sales - cost)(1-T) + (T*Depreciation)
Sales
COGS
Depreciation tax shield
Cash flow
1
7500000
1500000
8000000
9325000
2
7687500
1537500
8000000
9488125
3
7879688
1575938
8000000
9655328
4
8076680
1615336
8000000
9826711
5
8278597
1655719
8000000
10002379
6
8485562
1697112
7382439
7
8697701
1739540
7567000
8
8915143
1783029
7756175
9
9138022
1827604
7950079
10
9366472
1873294
8148831
11
9600634
1920127
8352552
12
9840650
1968130
8561365
13
10086666
2017333
8775400
14
10338833
2067767
8994785
15
10597304
2119461
9219654
16
10862236
2172447
9450146
17
11133792
2226758
9686399
18
11412137
2282427
9928559
19
11697440
2339488
10176773
20
11989876
2397975
10431192
Now putting this respective cashflows and inserting Year 0 = -38,800,000, in the BA II plus calculator or by using IRR NPV formula in the excel file with 8% discount rate, we can get the answer as follows:
NPV = $45,655,452
IRR = 23.03%
Note: The terminal year non operating cashflow is zero and thus the cashflow in year 20 will be operating cashflow itself
(sales - cost)(1-T) + (T*Depreciation)
Sales
COGS
Depreciation tax shield
Cash flow
1
7500000
1500000
8000000
9325000
2
7687500
1537500
8000000
9488125
3
7879688
1575938
8000000
9655328
4
8076680
1615336
8000000
9826711
5
8278597
1655719
8000000
10002379
6
8485562
1697112
7382439
7
8697701
1739540
7567000
8
8915143
1783029
7756175
9
9138022
1827604
7950079
10
9366472
1873294
8148831
11
9600634
1920127
8352552
12
9840650
1968130
8561365
13
10086666
2017333
8775400
14
10338833
2067767
8994785
15
10597304
2119461
9219654
16
10862236
2172447
9450146
17
11133792
2226758
9686399
18
11412137
2282427
9928559
19
11697440
2339488
10176773
20
11989876
2397975
10431192
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