Forecast cash flows and NPV: Wind energy The pressures of inevitably rising oil prices, concerns about climate change and improvements in alternative energy technologies indicate a growing demand for alternative energy sources, such as wind power. The coastal and north-central parts of North America feature reliable wind patterns (http://www.windpoweringamerica.gov/wind_maps.asp). Although many wind farms already have sprouted in these regions, the vast spaces and reliable wind can support many more installations. However, the blizzard of land use and tax regulations and the negotiating skills of energy companies, providers of capital and owners of land deter all but the most capable and patient deal makers.

Lynn Browne, a lawyer acquaintance of yours, has put together successful easement, access, and water use deals with ranchers and local government officials, and has built a reputation as an honest broker. Ms. Browne has recognised the need for professionals who can structure deals between capital providers, energy distribution companies and land owners to site wind farms. She is structuring a deal for a large Wyoming USA wind farm.

If successful, the deal will compensate her with ’success royalties’ that are paid as 1% of gross energy sales revenue in every year that WindSource Capital, the sponsoring capital provider, earns at least a 10% return (net income after tax) on average net assets (RONA).

Ms. Browne may accept annual royalty payments for 20 years, or she may choose a lump sum pay off based on a mutually agreed upon forecast over the expected 20-year life of the installed assets. She has hired you to estimate annual sales and expenses, including her ’success royalties,’ and a lump sum price she could use in her negotiations with Wind-

Source Capital.

Required:

1. Build a 20-year model of sales, expenses and return on assets for the planned wind farm based on the assumptions of the case shown below that you have gathered from various sources.

2. Compute a lump sum value of the stream of ’success royalties.’

3. Prepare a short memorandum that explains the sources of uncertainty in computing Lynn Browne’s success royalties from this deal.

Transcribed Image Text:

Project parameters ind plant si e, e a atts Available hours of operation, per year 300 00 me a atts Expected indener y production time Sales price per hour Ener y price ro th, per year 32 00 8,760 total annual hours i nore leap years a factor based on the ind farms location 6000 mar et price for one me a att, supplied for one hour 5.00 Success royalty rate, up to 100 of ross sales revenue indSources re uired after tax return on assets 1000 of R NA Lynn Bro nes discount rate 800 indSources effective income tax rate 35 Rene able ener y tax credit 21.00 per h produced Life of rene able ener y tax credit 10 years Operating expenses Base Annual growth perations maintenance per hour 4:00 250 Electricity cost per hour 025 400 Administration per hour 025 400 ransmission per hour 025 400 Contin ency per hour 025 400 Land royalties per hour 1.00 000 Insurance per year, millions 1 40 3.00 Pro ect mana ement per year, millions 160 000 Property tax per year, millions 1.00 000 Plant investment cost breakout Outlay Life 20 year e uipment SL depr 400 00 20 10 year e uipment SL depr 165 00 10 5 year e uipment 2 x SL depr 35 00 5 otal investment costs paid to indSource employees paid to electrical distribution utility company paid to indSource employees paid to electrical distribution utility company paid to a contin ency reserve paid to ranchers, land o ners paid to indSources insurance company paid to indSource employees paid to county overnment SL depr expense, ero salva e value SL depr expense, ero salva e value SL depr expense, ero salva e value 600.00 assume financed solely ithe uity capital