Assignment question:

a) Compute the Net Present Value of the projects free cash flows. Hint: You need to include the year 0 FCF (i.e., the net investment), and discount the FCFs from year 1 to 20. Note that in year 20 the project is liquidated.

b) Should East Light proceed with the project?

The case provides assumptions to project the Free Cash Flows of the Stillwater project.

Assumptions:

1. ITC is paid to the East Light in year 0. The size of the ITC is in the assumptions tab.

2. You can consider the 32M in construction costs and the $736,524 development costs as capital expenditures (capex) in year 0.

3. For tax purposes, East Light can depreciate the year 0 capex as follows: $25,372,500 in year 1 and the rest in a straight line from year 2 to year 11 to a salvage value of zero.

4. The solar farm will be operational in year 1 with an output of 33.75M kWh. Be sure to incorporate the 0.5% degradation per year in the output of the solar panels after year 1.

5. Note that the revenue per kWh will remain constant at $0.075.

6. Assume that net operating working capital is zero.

7. The rent is fixed at $80,000 per year for the whole 20-year project life. All other operating expenses (Operations & Maintenance, Insurance, Administrative, and Property Taxes) will grow at 2% per year.

8. At the end of the 20 years, the solar panels will be sold at 20% of the original capital expenditures of $32,736,524. Any capital gain or loss is taxed at the 21% corporate tax rate.

9. Assume that any loss in this project can be used to offset gains in the same period (perhaps in other projects of the fund).

10. To compute the WACC and to relever the beta asset, use as weights: ND/(ND+E) of 34% and E/(ND+E) of 66% (you can assume that cash is zero).1 The cost of debt of this project is 5%. You have been told that for a similar solar facility, a competitor used an equity beta of 1.5. However, the financing of that other solar facility had a more aggressive debt structure, with ND/(ND+E) of 55%.

11. You can find information about the yield curve at U.S. Department of the Treasury website by clicking here. Assume you are doing this analysis as of January 2, 2018.