Market Testing: BHP has already spent (and expensed) $1 million on a market study which has provided BHP with a sense of the magnitude of this market, and BHPs potential in the market.

2. Starting Investment: To get established in the solar energy generating business, BHP will spend $100million immediately to acquire interests in a number of solar panel manufacturers across Queensland. This investment will be depreciated over ten years, using straight line depreciation, starting in year 2.

3. Energy Coal Mine Conversion to Solar Farms: As NSW energy coal is becoming less competitive, BHP is also planning to retire its five existing energy coal extraction sites and covert them to five solar farms. The solar farms are expected to be operational and start exporting electricity to the grid in year 2. To accommodate this schedule, BHP will spend $200 million in year 1 to complete the rehabilitation of the five former mine sites and construction of solar farms. This investment will be capitalized and depreciated over ten years, using straight-line depreciation as well, starting in year 2. Each of the existing coal mine is estimated to generate $5 million in after-tax operating income per year if the mine were to continue operating.

4. New Solar Farms: Starting in year 2, BHP plans to construct 2 new solar farms each year for 5 years (Years 2-6). The cost of constructing a new solar farm is expected to be $30 million in year 2 and grow at the inflation rate (2.5%) beyond that. Like the other capital investments, these expenses will be depreciated using straight-line 4 depreciation over ten years, starting at the year after the year of each investment.

5. Solar Farm Economics: Each of the farms in the first year of operations (year 2) is expected to generate $20 million in revenues, and these per-farm revenues are expected to grow at the inflation rate (which is 2.5%). Note that farms only generate revenues in the year after they have been constructed. For example, the farms that are constructed in year 2 will record its first revenues in year 3.

6. Operating Expenses: Operating expenses including energy distribution and transmission expenses and other relevant expenses for the electricity generated by these solar farms are expected to be 45% of revenues.

7. Allocated costs: BHP will allocate 10% of its existing G&A costs to the renewable energy division, starting in year 2. These costs now total $30 million for the entire firm and are expected to grow 5% a year in the long term. Specific to this project, it is expected that BHP will have an increase of $1.5 million in general and administrative costs in year 2 when the new division starts generating revenues, and that this amount will grow at the same growth rate as the new divisions revenues after that.

8. Working Capital: The solar farm electricity sales will create working capital needs, which you have estimated as follows: The wholesale of electricity on credit to electricity retailers will create accounts receivable amounting to 10% of revenues each year. The trade credit offered by suppliers will be 5% of the operating expenses (not including depreciation, cost allocations or advertising expenses). Assume that BHP pays taxes on time and there is no overdue amount in taxes payable.

9. Side Benefits: If BHP starts to expand investment in solar farms and establish partnerships with carbon-neutral electricity retailers, there is the potential for increased sales by BHPs natural gas division to these retailers as part of the partnership contracts. BHP expects to generate about $5 million in additional revenues in natural gas with solar farms start to operate in year 2, growing at the inflation rate for aslong asthe solar farms continue in operation. BHP expects to generate the same EBIT to Revenue margin on these revenues as it did on its revenues in the fiscal year ended June 2020 (in Exhibit 1).

10. Financing: The current D/E ratio is 20%. The current debt rating for BHP is A. BHP 5 expects to finance the renewable energy generation division using a mix of equal debt and equity to finance the new project.

11. Taxes: BHPs marginal tax rate is 30%.

12. Macro Data: The expected inflation rate is 2.5%.

13. You have collected information on other renewable energy firms in Exhibit 2. The data includes the betas of these companies, their market values for debt (including operating leases) and equity, annual revenues, and operating income.

Estimate the after-tax incremental cash flows from the proposed investment to BHP over the next 13 years. For this purpose, you need to construct depreciation schedule, project revenue, operating costs etc. over the next 13 years. (Hint: get project revenues -> EBIT -> after tax EBIT -> after tax free cash flow to the firm). If the project is terminated at the end of the year 13, and both working capital and investment in other assets can be sold for book value at the end of that year, estimate the net present value of this project to BHP.

Estimate the internal rate of return for this project.

SUMMARY OUTPUT Regression Statistics Multiple R 0.626796098 R Square 0.392873348 Adjusted R Square 0.38816694 Standard Error 0.052133908 Observations 131 ANOVA df F Significance F 1.16201E-15 1 83.47625941 Regression Residual Total SS MS 0.226883828 0.226883828 0.350614822 0.002717944 0.57749865 129 130 Intercept ASX200 Coefficients 0.003093179 1.048498998 Standard Error t Stat 0.004573792 0.67628326 0.11475894 9.136534321 P-value 0.500071545 1.16201E-15 Lower 95% -0.00595618 0.821445624 Upper 95% 0.012142538 1.275552372 Lower 95.0% -0.00595618 0.821445624 Upper 95.0% 0.012142538 1.275552372 beta Rf Rm Cost of capital 1.04850 0.98% 4.34% 4.50% SUMMARY OUTPUT Regression Statistics Multiple R 0.626796098 R Square 0.392873348 Adjusted R Square 0.38816694 Standard Error 0.052133908 Observations 131 ANOVA df F Significance F 1.16201E-15 1 83.47625941 Regression Residual Total SS MS 0.226883828 0.226883828 0.350614822 0.002717944 0.57749865 129 130 Intercept ASX200 Coefficients 0.003093179 1.048498998 Standard Error t Stat 0.004573792 0.67628326 0.11475894 9.136534321 P-value 0.500071545 1.16201E-15 Lower 95% -0.00595618 0.821445624 Upper 95% 0.012142538 1.275552372 Lower 95.0% -0.00595618 0.821445624 Upper 95.0% 0.012142538 1.275552372 beta Rf Rm Cost of capital 1.04850 0.98% 4.34% 4.50%