Question 3 [30]

Electrifying Visioneering Technologies (EVT) is a company that focuses on electricity technology investments. The recent developments in electrification of the transportation sector have shown that opportunities in the supply of electricity to electric vehicles (EVs) powered by renewable electricity are core to addressing pollution reduction, efficient transportation and energy security challenges. EVT must identify two opportunities in the electrification value chain. They include installing electric vehicle charging stations and renewable energy production. You have been assigned by EVT to perform an economic analysis of these two opportunities and advise EVT which is the economically viable option(s).

After conducting basic research, you compile the following information:

Project life: 10 years

Base year: 2024 (assume plants will be ready for operation in 2025 onwards).

Depreciation: Straight line over project life to zero (assume no scrap value).

Electricity cost in South Africa is estimated to average R2.82/kWh in 2022. An increase

of about 20% is anticipated in 2023. Thereafter it is assumed to grow at 8% (6% maximum inflation plus 2%) for the projects life.

The electric vehicle charge rate in South Africa is estimated to average R5.90/kWh in 2022. Assume it increases at 2% per annum throughout the life of the project.

Assume all electricity is sold at the 4-tier prices:

o Charging electricity station for light vehicle cars rated at 24kW for 20 minutes for

one car. Approximately 15 cars per day in this category will be serviced.

o Charging electricity station for medium cars rated at of 50kW for 40 minutes for one car. Approximately 12 cars per day in this category will be serviced.

o Charging electricity station for high-powered cars rated at of 90kW for 60 minutes for one car. Approximately 4 cars per day in this category will be serviced.

o The remainder of the electricity will be sold to Eskom.

Operation costs increase at 3% for the duration of the project to cover inflation and

unforeseen costs increase.

Company tax: 28% (ignore other taxes)

(EVT has no debt and its cost of equity is 14%. It can borrow at 8%.

The table below gives data of the leading electricity plants and technologies EVT has picked for evaluation in the 10-year period project life.

EVT management has asked you to perform the profitability analysis and make recommendations which address the following questions:

3.1. What is the WACC suitable for EVT if it decides to borrow up to the equivalent of 25% of its current equity? The proceeds would be used to buy back shares of the company. [6]

3.2. Discuss major factors that you would consider when making a capital structure decision specific to these EVT projects. [3]

3.3. What are the projects estimated NPVs for the following options? [16]

a. DC Fast Charging Station, assuming electricity is bought from Eskom. [4]

b.Hydropower plant, assuming that all electricity produced is sold to Eskom only. [4]

c. Integrated business based on sales of 4-tier prices. [8]

3.4. What is the payback period for integrated business? [2]

3.5. Based on the NPV calculations and payback above, what are your

recommendations? Justify your answer. [3]

1. Establish this value based on Note 3 for your calculations. 2. Two electric vehicle charging stations, each based on 10 charging points, are needed to meet the electricity requirements of electric vehicle charging stations' output capacity specified below. 3. Output capacity is based on the following charging assumptions: - Charging electricity station for light vehicle cars rated at 24kW for 20 minutes for one car. Approximately 15 cars per day in this category will be serviced. - Charging electricity station for medium cars rated at 50kW for 40 minutes for one car. Approximately 12 cars per day in this category will be serviced. - Charging electricity station for high power cars rated at 90kW for 60 minutes for one car. Approximately 4 cars per day in this category will be serviced. - 345 days per year selected to allow for maintenance, unforeseen breakdowns and electricity availability