You have been approached by a developer with South Carolina solar project. Your

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

Capital expenditure $40,000,000 Investment Tax Credit(3% of investment) $1,200,000 Net investment $38,800,000 A Production per year(MWh) 50000 B Price in the first year per MWh $150 C=A*B Revenue in first year $7,500,000 COGS in the first year=X EBITDA in first year=(7500000-X) X=0.25*EBITDA=0.25*(7500000-X) 1.25X=7500000 X= $        6,000,000 Operating expenses in the first year $        6,000,000 EBITDA in first year= $1,500,000 (7500000-6000000) After tax cash inflow in first year(1500000*(1-0.35) $975,000 CALCULATION OF DEPRECIATION TAX SHIELD C Annual depreciation for 5 years(40000000/5) $8,000,000 D=C*0.35 Annual depreciation tax shield for 5 years $2,800,000 Present value(PV) of cash flow=(Cash flow)/(1+i)^N i=discount rate=8%=0.08, N=year of cash flow Plant life 20 years YEAR WISE CASH FLOW GIVEN BELOW N A B C=A+B D=C/(1.08^N) Year Cash flow Depreciation Net PV of Net (operations) Tax shield Cash flow Cash flow 0 ($38,800,000) $0 ($38,800,000) -38800000 1 $975,000 $2,800,000 $3,775,000 3495370.37 2 $999,375 $2,800,000 $3,799,375 3257351.68 3 $1,024,359 $2,800,000 $3,824,359 3035899.773 4 $1,049,968 $2,800,000 $3,849,968 2829841.676 5 $1,076,218 $2,800,000 $3,876,218 2638088.545 6 $1,103,123 $0 $1,103,123 695154.6141 7 $1,130,701 $0 $1,130,701 659753.2217 8 $1,158,969 $0 $1,158,969 626154.678 9 $1,187,943 $0 $1,187,943 594267.1713 10 $1,217,641 $0 $1,217,641 564003.5653 11 $1,248,082 $0 $1,248,082 535281.1615 12 $1,279,284 $0 $1,279,284 508021.4727 13 $1,311,267 $0 $1,311,267 482150.0089 14 $1,344,048 $0 $1,344,048 457596.0732 15 $1,377,649 $0 $1,377,649 434292.5695 16 $1,412,091 $0 $1,412,091 412175.8183 17 $1,447,393 $0 $1,447,393 391185.3831 18 $1,483,578 $0 $1,483,578 371263.9052 19 $1,520,667 $0 $1,520,667 352356.9471 20 $1,558,684 $0 $1,558,684 334412.8433 TOTAL -16125378.52 NPV $ (16,125,379) IRR 0.0328% (Using IRR function of excel) If COGS =25% of Revenue:(instead of EBITDA) After tax cash flow in first year=0.75*7500000*0.65 $        3,656,250 Yearwise Cash flow Year N A B C=A+B D=C/(1.08^N) Year Cash flow Depreciation Net PV of Net (operations) Tax shield Cash flow Cash flow 0 ($38,800,000) $0 ($38,800,000) -38800000 1 $3,656,250 $2,800,000 $6,456,250 5978009.259 2 $3,747,656 $2,800,000 $6,547,656 5613559.885 3 $3,841,348 $2,800,000 $6,641,348 5272115.893 4 $3,937,381 $2,800,000 $6,737,381 4952176.42 5 $4,035,816 $2,800,000 $6,835,816 4652341.427 6 $4,136,711 $0 $4,136,711 2606829.803 7 $4,240,129 $0 $4,240,129 2474074.581 8 $4,346,132 $0 $4,346,132 2348080.043 9 $4,454,786 $0 $4,454,786 2228501.892 10 $4,566,155 $0 $4,566,155 2115013.37 11 $4,680,309 $0 $4,680,309 2007304.356 12 $4,797,317 $0 $4,797,317 1905080.523 13 $4,917,250 $0 $4,917,250 1808062.533 14 $5,040,181 $0 $5,040,181 1715985.275 15 $5,166,186 $0 $5,166,186 1628597.136 16 $5,295,340 $0 $5,295,340 1545659.318 17 $5,427,724 $0 $5,427,724 1466945.187 18 $5,563,417 $0 $5,563,417 1392239.645 19 $5,702,502 $0 $5,702,502 1321338.552 20 $5,845,065 $0 $5,845,065 1254048.162 TOTAL 15485963.26 NPV $    15,485,963 IRR 13.4245% (Using IRR function of excel)

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