PROJECT-SPECIFIC WACC. In 2014, worldwide capacity of wind-powered generators was growing. Wind power still constitute a small fraction of worldwide electricity use, but in Denmark, wind power provides over 20% of electricity. Moreover, the use of wind power has grown rapidly in recent years. The key feature of wind power is heavy capital intensity and low ongoing costs (the wind is free). Combined with advances in wind power generation technology, this alternative power source appears to be one of the most promising clean energy sources for the future.

Gusty Power Company (GPC) of Amarillo, Texas, builds and operates wind farms that produce electrical powerwhich is then sold into the electrical grid. GPC has recently been contracted by the Plains Energy Company of Plainview, Texas, to construct one of the largest wind-power farms ever built. Plains energy is an independent power producer that normally sells all the electrical power it produces back into the power grid at prevailing market prices. However, in the instance Plains has arranged to sell all of its production to a consortium of electric power companies in the area for a long-term, contractually set prices. Assume that the project generates perpetual cash flows (annual project FCF) of 9,500,000, debt principal is never repaid, capital expenditures (CAPEX) equal depreciation in each period, and the tax rate is 35%. Cost of equity 10.25%.

The project calls for an investment of $150 million, and Plains has arranged for an $125 million project loan which has no recourse to Plain?s other assets. The loan carries a8 % rate of interest, which reflects current market conditions for loans of this type. Plains will invest $9.5 million in the project, and the remainder will be provided by two local power companies that are part of the consortium that will purchase the electrical power the project produces.

a.What the project-specific WACC calculated using the book values of debt and equity as a proportion of the $ 150 million cost of the project ? Given this estimate of the WACC, what is the value of the project ?

b.Reevaluate the project-specific WACC using your estimate of the value of the project from part a above as the basis for your weights. Use this WACC to reestimate the value of the project and then recalculate the weights for the project-finance WACC using this revised estimate of WACC. Repeat this process until the value of the project converges to a stable value. What is the project?s value ? What is the project-finance WACC ?

c.Reevaluate the project-specific WACC and project value where the contract calls for a 2,5 % rate of increase in the project free cash flow beginning in the second year of the project?s life.

Please fill in the excel file included

Refer to the textbook for the problem description but use the following given nu PROBLEM 5-8 GUSTY POWER COMPANY Project generates perpetual cash flow, debt principal is never repaid, CAPEX is equal to Depre Annual project FCF is $ 9,5000,000.00, and the tax rate is 35% a. Project specific WACC , Project Value using book values for Debt and Equity Project costs $ 150,000,000.00 Project FCF (1-30 yrs) $ 9,500,000.00 Non-recourse loan (book debt) $ 125,000,000.00 Loan interest rate (Rd) 8.00% Equity-Plains $ 12,500,000.00 Equity-others $ 12,500,000.00 Assume capex = depreciation Assume perpetual cash flows 35.00% tax rate 10.25% cost of equity change from textbook change from textbook change from textbook change from textbook change from textbook change from textbook change from textbook Operational FCF work from bottom up EBIT $ Taxes @ 35% $ NOPAT $ Depreciation CAPEX Change in net operational working capital $ - there is no working capital so this is 0 Operational FCF $ EBIT Interest EBT Tax (35%) EAT (Net Income) Equity FCF $ WACC computations Weights Weight % Rd, Re Tax rate Tc Kd, Ke Weighted Kd, Ke 9,500,000.00 - Debt Equity D+E WACC b. Project Value and Project Finance WACC i) Iterative Process Iteration Number 1 2 3 4 5 Book debt $ $ $ $ $ Trial value of equity 125,000,000.00 $ 25,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 Book debt + Trial value of equity ### 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 125,000,000.00 ii) Excel Solver Process (show Solver report for solutions) Iteration Number 1 Book debt Trial value of equity $ 125,000,000.00 $ 25,000,000.00 Book debt + Trial value of equity ### c.Project FCFs are growing at 2.50 % i) Excel Solver Process (show Solver report for solutions) Book debt + Trial value of Iteration Number Book debt Trial value of equity equity 1 $ 125,000,000.00 $ 85,483,870.97 ### but use the following given numbers 8 MPANY epaid, CAPEX is equal to Depreciation each period 0, and the tax rate is 35% Score Max 50 Exam 150 Extra Max 150 Bonus al so this is 0 WACC WACC 0.00% Project Value Difference () in Value of project Computed (based on WACC) value of equity Equity Value 25 ort for solutions) WACC WACC Project Value Value of project based on WACC Difference () in Computed value of equity Equity Value WACC Project Value 2.50% rt for solutions) WACC Value of project based on WACC Imputed value Difference () in of equity Equity Value 150 150