After hearing American Solars sales proposal, Hanover Inns decided to hire your group as the consultants to conduct a set of capital budgeting analysis. The goal is to understand the costs and benefits of different plans and help them make an optimal decision. Your group decides to set up models to compute the incremental cash flows and NPV of the following scenarios:

1. conventional roof, no financing, no energy inflation

This means the hotel pays for the new roofs out of its regular capital budget without taking on any special financing

Consider the incremental cash flows from the initial investment, and tax shield from depreciation expenses

Assume straight-line depreciation

Assume a WACC of 9%

2. conventional roof, no financing, a 3% energy inflation, with a WACC of 12%

3. installing solar roof, with tax credit, no financing, no energy inflation

Consider the incremental cash flows from the initial cash investment, tax credit, tax shield from depreciation expenses, and after-tax energy savings

Depreciation expense would be computed based on the MACRS 5-year schedule

Assume a WACC of 9%

4. installing solar roof, no financing, a 3% energy inflation, with a WACC of 12%

5. installing conventional roof, using mortgage, no energy inflation

Consider the incremental cash flows from initial investment, tax shield from depreciation expenses, and the tax shield from interest expense

Use an amortization schedule to work out the interest expense each year, based on the

Assume a cost of equity of 10%

6. installing solar roof, using SEIT financing, no energy inflation

SEIT financing means there is no initial cash outlay for the roof. Instead the hotel needs to pay an annual lease payment. That also means there is no incremental annual depreciation expense.

Consider the incremental cash flows from the after-tax lease payment and after-tax energy savings

Assume a cost of equity of 10%

Summarize the results, discuss what factors would affect the results, and present a recommendation to the hotel. In your recommendation, you may also discuss the additional benefits of installing the solar roofs.