• SBC Pty Ltd intends to form a special purpose vehicle (SPV) to be incorporated in Australia. This will involve building new water treatment facilities. SBC Pty Ltd intends to undertake the development of the proposed water treatment facilities through a project financing approach. The constructed facilities will be used as the business solution in providing clean water solutions to the local community. The following are some of the in-principle agreements with the various parties after much negotiation: 1. The project is to be developed using a BOT arrangement where WaterSolution will finance and build, operate and transfer (BOT) the facility back to the state government at the end of 20 years. 2. There are three off-take agreements: a) to sell CallWater Pty Ltd 550,000 cubic litre of treated water per day at a fixed price of $0.0225 per cubic litre. This agreement will expire at the end of 20 years. The contract allows for the price to increase by 8% per annum. b) to sell APWater Limited 650,000 cubic litre of treated water per day at a fixed price of $0.0250 per cubic litre. This agreement will expire at the end of 20 years. The contract allows for the price to increase by 7% per annum. c) to sell Nuwater Pty Ltd 700,000 cubic litre of treated water per day at a fixed price of $0.0275 per cubic litre. This agreement will expire at end of 20 years. The contract allows for the price to increase by 6% per annum. 3. The capital expenditure (include construction cost plus all relevant professional fees, insurance) is estimated at $80,000,000 incurred at year 0. 4. WaterSolution has an agreement to buy untreated water 2,000,000 cubic litre from DirtyWater Ltd at the price of $0.012 per cubic litre. The price of untreated water will increase by 2% per annum. 5. The annual operation cost (starting from year 1) is estimated to be as follows: - Management fees $450,000 per annum with an increase of 5% per annum. - Maintenance works $550,000 per annum with an increase of 4% per annum. Page 2 of 2 - Insurance costs $250,000 per annum with an increase of 3% per annum. - Miscellaneous costs are fixed at $150,000 per annum. Also, assume the following: (a) Current interest-free rate (based on Government bond) is 4.5%. (b) SBC Pty Ltd’s beta is estimated to be 1.5 (based on the ratio of the standard deviation of the firm’s return to the standard deviation of the stock market return). (c) Expected market return of the water industry where SBC Pty Ltd main business lies, is 9.5% (d) WaterSolution will borrow 70% of the capital expenditure from a consortium of banks at a cost of 10%. The repayment will start immediately in Year 1 and should be repaid fully in year 20. The remaining 30% is raised through equity. (e) Assume construction completed in year 0 and operation begin immediately in year 1. (f) Assume there is no tax involved. Requirements: 1. Calculate and interpret the payback period 2. Calculate and interpret the Project Internal Rate of Return (IRR) 3. Calculate and interpret Expected Return using Capital Asset Pricing Model (CAPM). 4. Calculate and interpret the Weighted Average Cost of Capital (WACC). 5. Calculate and interpret the Profitability Index (PI). (use WACC as discount rate) 6. Calculate and interpret the NPV. (use WACC to discount rate) 7. Should the project go ahead using project finance scheme? Give your reasons