A consortium secured a 20 year concession to build a water treatment plant of capacity 15,000 cubic metre per day (m3/d). Water tariff for a water treatment project is described by the following formula :

Component	Comment
Capacity Payment A (based on availability capacity)
A1	Capital Recovery Charge to cover debt service & equity
A2	Fixed O&M Charge to cover labour, insurance, planned maintenance
A3	Fixed Energy Charge to cover fixed grid and electricity charges
Output Payment B (based on actual water output)
B1	Variable O&M Charge to cover chemicals & consumables
B2	Variable Energy Charge to cover UoS & electricity supply charges

The project company secured a US$10 million loan with an interest fixed at 5% p.a. and payable in annual instalments of principal (assume principal to be paid progressively within 12 months each year) plus interest under an equal principal repayment structure. Ignore construction period and assume 12 year financing with a two-year grace period for the principal.

The sponsors will also invest US$5 million into this project, with a 15% IRR target.

The present value of a series of constant annuities is given by

PV = C { (1/r)-1/(r*(1+r)^n )}

Where

C	Constant annuity payment
r	Discount rate or IRR
n	No of period

Question

The state Power Utility company collects tariff from end-user in local currency Local $ thus subjecting the investors to FX risk. Upon negotiation, the State Power Utility company allows USD indexation to be built into Component A. Suggest an indexation formula for Component A. Please include calculation for working.