Reference no: EM132874486
Background information:
Deep Pocket Fund (DPF) has a solar energy project under evaluation. The initial investment of this project includes land purchase and a solar energy generating system. Deep Pocket Fund has no plan to operate it forever. Their strategy is to set up the energy plant and sell the energy to the spot market as a long-term project. As a financial analyst of DPF, your manager asked you to evaluate the project, and offer advice on which solar system they should adopt.
The detailed information is as below:
1. Project life is 30 years.
2. Land cost $5 million. The land is expected to appreciate by 1.5% per year over 30 years. Assume your cost of land is a fair market value and you are expected to sell the land at fair market value by the end of 30 years.
3. You have a choice of choosing fixed solar panels or rotating solar panel systems. 1 MWh (1000 kW per hour) system of rotating panel systems costs $1.3 million. Your purchased land allows you to build a 25MWh system. A rotating solar system is more efficient in producing solar energy with an average output of 5.6 hours per day. The maintenance cost is about 10% of the sales revenue.
4. If you use fixed solar panel systems. 1MWh (1000 kW per hour) system costs $1.1 million. You can build a 30MWh system as the fixed systems require less space. However, the effective output from the average daily sunshine is about 4.5 hours. The maintenance cost is about 8% of the sales revenue.
5. You can sell your electricity to the spot market at price of $80 per MWh in the first three years and then the price will increase by $2 every three years. You will also get a government bonus of $70 per MWh (e.g, Large-Scale Generation Certificate) for the first 5 years.
6. After 30 years, it will cost you $50,000 to dump all equipment and clean the site.
7. Additional assumptions: - The discount rate for the project is 8%. - The tax rate is constant at 30%. Capital gains tax is 15% for land sales after 30 years (50% discount of the normal tax rate). - Straight line depreciation of solar systems with zero salvage. - 365 days per year. - Both systems will lose 0.75% efficiency per year
Task
The management of Deep Pocket Fund have requested that you provide a detailed financial analysis of each option and prepare a report that recommends a preferred option.
The following requests have been made about the analysis and report:
- The financial analysis is to be completed in Excel. The file is to be easily adjustable for different scenarios and all inputs must be in the one sheet called ‘Assumptions'. The analysis of each solar system type must be on a separate sheet.
- The report is to be short (600 words + 20% tolerance) and written in a manner that can be understood by a person with a basic understanding of financial analytical tools.
- The report sections include: Summary, Methodology, Recommendations and Limitations.
o Summary: brief outline of the task and advises of the recommendation.
o Methodology: must explain and justify the methodology employed.
Using either the Internal Rate of Return (IRR) or the NPV.
o Recommendations: recommend a preferred option. In addition, includes analysis on the sensitivity of the decision to the discount rate (e.g. try between 5% and 15%).
o Limitations: must identify key limitations with the analysis (recommend additional analysis to alleviate these limitations where appropriate)
Attachment:- Assumptions and worksheet.rar