Posted: June 1st, 2015

Assignment #3

Assignment #3

Evaluation of a Cogeneration Project

Capital cost:

Construction cost                        $80.00 million
Commitment fees and financing cost                   10.00 million
Construction draw-down period                          18 months
Total capitalization                        $90.00 million

Financing arrangement:

Long-term debt    Per cent to be determined by the borrowing capacity using a = 1.50
Equity capital         Sponsors (local utility and engineering firm):  50%
Passive investors:                                              50%

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:  90 percent
2.    Prices at the time the plant is placed in service and contracted growth rates
Electricity    $45 per megawatt-hour (MWH), annual increase 6%
Steam         $4.40 per thousand pounds; annual increase 5%
Natural gas    $3.850 per million BTU; annual increase 5%
3.    Predicted volumes at 90 percent capacity
Electricity production:    1,700,000 MWH
Steam production        1,150 million pounds
Gas usage            14,750.1 billion BTU
4.    Operating and other expenses:
First year = $6.5 million; annual increase 4%.
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