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Capital cost:
Construction cost $85.00 million
Commitment fees and financing cost 5.00 million
Construction draw-down period 18 months
Financing arrangement:
Long-term debt Per cent to be determined by the borrowing capacity using = 1.20
Equity capital Sponsors (local utility and engineering firm): 40%
Passive investors: 60%
Capital is to be depreciated on straight-line basis over 10 years.
Debt to be paid back in 10 years in equal amounts
Interest rate on debt: 8 per cent per annum
Cash flow projections:
Assumptions:
1. Capacity utilization: 95 percent
2. Prices at the time the plant is placed in service and contracted growth rates
Electricity $45 per megawatt-hour (MWH) annual increase 5%
Steam $4.00 per thousand pounds; annual increase 5%
Natural gas $3.50 per million BTU; annual increase 4%
3. Predicted volumes at 95 percent capacity
Electricity production: 1550000 MWH
Steam production 1060 million pounds
Gas usage 14700.1 billion BTU
4. Operating and other expenses:
First year = $6.5 million; annual increase 5%.
5. Tax rate: 40%.
6. Residual value of the project (after tax): $70 million
The project is to be evaluated for 15 years. The relevant discount rate for calculating the NPV is 10%.
Calculate the NPV and the IRR