Question
I need the complete solution for the following problem, espacially parts 4,5 & B: A. The financial statement of X, a company that focuses on
I need the complete solution for the following problem, espacially parts 4,5 & B:
A. The financial statement of X, a company that focuses on renewable energy investment, indicates that the company has $5 million of debt (with average interest rate of 3.8%) and $8 million of asset. The company has 1 million shares of stock traded in the market at the price of $4 per share. An analyst reports that the prevailing risk-free rate in the market is 2.8%, the expected market risk premium is 4.8%, and the beta (which reflects the volatility of Company Xs stock price) is 1.4. Company X is considering investing in 3 energy projects: Project A costs $ 1.3 million to invest now and generates cash flow of $312,000 at the end of each of the first 5 years, $290,000 at the end of year 6, $300,000 at the end of year 7, and nothing after that. Project B costs $2.5 million to invest 1 year from now and generates cash flows of $600,000 at the end of the first 5 years after investment and nothing after that. Project C costs $2.2 million to invest three years from now and generates cash flows of $480,000 at the end of the first 9 years after investment and nothing after that. 1. Apply the Capital Asset Pricing Model (CAPM) to determine the cost of equity for Company X. 2. Calculate the Weighted Average Cost of Capital (WACC) of company X. 3. Calculate the Net Present Values (NPV), Internal Rate of Returns (IRRs) and payback periods for project A, B and C. Which project(s) shall Company X undertake? 4. Suppose the government may pass a critical renewable energy regulation in 2 years from now. If the regulation is passed, the revenue of project A will increase by $20,000 every year, the revenue of project B will increase by $30,000 every year, the revenue of project C will increase by $10,000 every year. The probability for the government to pass the regulation is 60%. Using NPV as the decision criteria, prioritize the projects for Company X to undertake. Any project(s) shall not be undertaken? 5. Following (4), suppose Company X has to pay a fee now to keep the investment opportunity of project C alive in 3 years from now, what is the maximum amount of the fee company X would be willing to pay now? B. Following 1, Company X is considering investing in a 0.6 GWe power plant with the following features: construction cost = $1.25 billion (full amount paid at the beginning of the 2 years of construction time); operation lifetime (after construction is completed) = 25 years; capacity factor= 0.72; operation and maintenance cost = $ 33 million per year, fuel cost: $ 56 million per year; decommission cost: $0.4 billion. 1. Calculate the levelized cost of energy (LCOE) of the power plant 2. Suppose fuel cost is uncertain. More specifically, the annual fuel cost is normally distributed with mean of $ 56 million and $ 2.4 million of standard deviation, what is the LCOE at 0.05 significance level.
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