Since starting as an analyst a few months ago at Greenstreet Partners, you have done well. As a result, your boss, Managing Director Martha Sparin continues to give you more responsibility and more difficult projects. She has called you into her office for another assignment: Ok, we have another solar field project for you to study for us. We don't know if we're going to buy it and we don't know if we're going to finance it with leverage want to get your thoughts on both. This solar field has already been built and has a 5-year PPA (Power Purchase Agreement) with the City of Puma, Illinois. The plan is that the City of Puma is going to buy all the power that the solar field produces for the next 5 years. Here are some specifics though: - We will pay $1mm for the already existing solar field - For the next 5 years the panels will produce consistent power of 1.1mm kW per year that Puma will buy from us at $.10 per kW. - We then will sell the field at the end of 5 years for $800,000 We want you to work out how this deal works out for us on an NPV and IRR basis if we do this without any debt. If we do it without any debt, you should assume we use a 7% discount rate. We also want you to analyze this if we do use leverage. - We will get an amortizing 20 year loan for $500,000 at a 5% rate. We will make the payments each of the 5 years on this. - However, once we sell the field in 5 years, we'll have to pay back the remaining balance of the debt. For this case we need to use a Weighted Average Cost of Capital or WACC. Since we think the whole project has a 7% discount rate and we're financing 50% of the project with debt at 5%, our equity needs to earn a 9% return. So in the leverage case, use a 9% discount rate for the cost of equity. We also want to know how this works out for us on an NPV and IRR basis if we do use debt here. My assistant is preparing a spreadsheet, which will be available to you. At the bottom of it, there is a place for you to recommend whether we should do the project at all and in that, it would be helpful for you to discuss your decision in terms of NPV and IRR. So you need to determine 1) NPV and IRR if we don't use debt, 2) NPV and IRR if we do use debt and 3) A few sentences on whether to do the project based on what you found in NPV and IRR. The spreadsheet is laid out for you to answer these questions and do the necessary calculations. Greenstreet Partners - Puma, Illinois Solar Field Acquisition Year o 1 2 3 4 5 Field Purchase $(1,000,000) Power Produced (kW) Price per kW Power Purchase Revenue 0.1 $ $ 1,100,000 0.10 $ 110,000 $ 1,100,000 0.10 $ 110,000 $ 1,100,000 0.10 $ 110,000 $ 1,100,000 0.10 $ 110,000 $ 1,100,000 0.10 110,000 Field Sale $ 800,000 Total Cashflows $(1,000,000) $ 110,000 $ 110,000 $ 110,000 $ 110,000 $ 910,000 Unlevered Calculations 7% Discount Factor PV of Cash Flows 1.00 $(1,000,000) NPV of Project II IRR of Project Levered Calculations Debt Payment Calc IN 5% Debt Pay Off Calc IN 1 PV FV PMT 20 5% 5000001 0 Calculate PV FV PMT $0.00 110,000 $ 110,000 $ 110,000 $ 110,000 $ 910,000 Unlevered Cash Flows Debt Return of Capital Debt Payment Pay off Debt $(1,000,000) $ $ 500,000 Levered Cash Flows $ (500,000) $ 110,000 $ 110,000 $ 110,000 $ 110,000 $ 910,000 Discount Factor PV of Cash Flows 9% 1.00 $ (500,000) NPV of Project IO IRR of Project Should we do this project at all? If so, levered or unlevered? Explain below Since starting as an analyst a few months ago at Greenstreet Partners, you have done well. As a result, your boss, Managing Director Martha Sparin continues to give you more responsibility and more difficult projects. She has called you into her office for another assignment: Ok, we have another solar field project for you to study for us. We don't know if we're going to buy it and we don't know if we're going to finance it with leverage want to get your thoughts on both. This solar field has already been built and has a 5-year PPA (Power Purchase Agreement) with the City of Puma, Illinois. The plan is that the City of Puma is going to buy all the power that the solar field produces for the next 5 years. Here are some specifics though: - We will pay $1mm for the already existing solar field - For the next 5 years the panels will produce consistent power of 1.1mm kW per year that Puma will buy from us at $.10 per kW. - We then will sell the field at the end of 5 years for $800,000 We want you to work out how this deal works out for us on an NPV and IRR basis if we do this without any debt. If we do it without any debt, you should assume we use a 7% discount rate. We also want you to analyze this if we do use leverage. - We will get an amortizing 20 year loan for $500,000 at a 5% rate. We will make the payments each of the 5 years on this. - However, once we sell the field in 5 years, we'll have to pay back the remaining balance of the debt. For this case we need to use a Weighted Average Cost of Capital or WACC. Since we think the whole project has a 7% discount rate and we're financing 50% of the project with debt at 5%, our equity needs to earn a 9% return. So in the leverage case, use a 9% discount rate for the cost of equity. We also want to know how this works out for us on an NPV and IRR basis if we do use debt here. My assistant is preparing a spreadsheet, which will be available to you. At the bottom of it, there is a place for you to recommend whether we should do the project at all and in that, it would be helpful for you to discuss your decision in terms of NPV and IRR. So you need to determine 1) NPV and IRR if we don't use debt, 2) NPV and IRR if we do use debt and 3) A few sentences on whether to do the project based on what you found in NPV and IRR. The spreadsheet is laid out for you to answer these questions and do the necessary calculations. Greenstreet Partners - Puma, Illinois Solar Field Acquisition Year o 1 2 3 4 5 Field Purchase $(1,000,000) Power Produced (kW) Price per kW Power Purchase Revenue 0.1 $ $ 1,100,000 0.10 $ 110,000 $ 1,100,000 0.10 $ 110,000 $ 1,100,000 0.10 $ 110,000 $ 1,100,000 0.10 $ 110,000 $ 1,100,000 0.10 110,000 Field Sale $ 800,000 Total Cashflows $(1,000,000) $ 110,000 $ 110,000 $ 110,000 $ 110,000 $ 910,000 Unlevered Calculations 7% Discount Factor PV of Cash Flows 1.00 $(1,000,000) NPV of Project II IRR of Project Levered Calculations Debt Payment Calc IN 5% Debt Pay Off Calc IN 1 PV FV PMT 20 5% 5000001 0 Calculate PV FV PMT $0.00 110,000 $ 110,000 $ 110,000 $ 110,000 $ 910,000 Unlevered Cash Flows Debt Return of Capital Debt Payment Pay off Debt $(1,000,000) $ $ 500,000 Levered Cash Flows $ (500,000) $ 110,000 $ 110,000 $ 110,000 $ 110,000 $ 910,000 Discount Factor PV of Cash Flows 9% 1.00 $ (500,000) NPV of Project IO IRR of Project Should we do this project at all? If so, levered or unlevered? Explain below