ABC Pty Ltd intends to form a special purpose vehicle (SPV) in Australia. This will involve building new water treatment facilities. ABC Pty Ltd intends to undertake the development of the proposed water treatment facilities through a project financing approach. The constructed facilities will be used as the business solution in providing clean water to the local community. The following are some of the in-principle agreements with the various parties after much negotiation:

1. The project is to be developed using a BOT arrangement where WaterSolution will finance and build, operate and transfer the facilities back to the state government at the end of 20 years.
2. There are three off-take agreements:
   • to sell CallWater Pty Ltd 450,000 cubic litre of treated water per day at a price of $0.025 per cubic litre. This agreement will expire at the end of 20 years. The contract allows for the price to increase by 7% per annum.
   • to sell APWater Limited 550,000 cubic litre of treated water per day at a fixed price of $0.020 per cubic litre. This agreement will expire at the end of 20 years. The contract allows for the price to increase by 10% per annum.
   • to sell Nuwater Pty Ltd 600,000 cubic litre of treated water per day at a fixed price of $0.030 per cubic litre. This agreement will expire at end of 20 years. The contract allows for the price to increase by 5% per annum.
3. The capital expenditure (include construction cost plus all relevant professional fees, insurance) is estimated at $85,000,000 incurred at year 0
4. WaterSolution has an agreement to buy untreated water from DirtyWater Ltd at a price of $0.012 per cubic litre. The price of untreated water will increase by 3% per annum.
5. The annual operation cost (starting from year 1) is estimated to be as follows:
   • a. Management fees $350,000 per annum with an increase of 10% per annum
   • b. Maintenance works $600,000 per annum with an increase of 10% per annum
   • c. Insurance cost $150,000 per annum with an increase of 5% per annum
   • d. Miscellaneous cost is fixed at $100,000 per annum

Also assume the following:

1. Current interest-free rate (based on Government bond) is 3.5%
2. ABC Pty Ltds beta is estimated to be 0.9 (based on the ratio of the standard deviation of the firms return to the standard deviation of the stock market return)
3. Expected market return of the water industry where ABC Pty Ltd's main business lies, is 15%
4. WaterSolution will borrow 75% of the capital expenditure from a consortium of banks at a cost of 12%. The repayment will start immediately in Year 1 and should be repaid fully in year 20. The remaining 25% is raised through equity.
5. Assume construction completed in year 0 and operation begin immediately in year 1
6. Assume there is no tax involved

Prepare a report to the Board of ABC Pty Ltd. In your report, you should include (but not limited to):

1. Calculation of the Project IRR
2. Calculation of the Equity IRR
3. Calculation of the DSCR
4. Calculation of Expected Return on Equity using CAPM
5. Calculation of the WACC
6. Recommendation to the Board on whether the project go ahead using project finance scheme? Give your reasons and justifications.