SOLAR POWER SYSTEM INVESTMENTIn January $2022,$ Chen recognized the potential opportunity to invest in a solar power system. A contractorsubmitted two independent proposals for solar systems: one for the $100$kW$,$ the other for the $230$kW$.$ Thesolar panels for the $100$kW system would require $7,000$ square feet $(650$ square metres$)$ of roof space, whilethe solar panels for the $230$kW system would require $15,000$ square feet $(1,400$ square metres$).$ Theproposals suggested installing the $100$kW system on the main factory roof and the $230$kW system on themain factory roof with its excess panels on the finished goods warehouse built primarily to support storageof finished goods inventory $($see Exhibit $5).$Both systems consisted of solar panels, mounting equipment, inverters, wiring, and labour required forinstallation. And once parts were acquired, installation would take six weeks. The contractor wouldpurchase and import the parts and equipment then install in $2022,$ with the system becoming operationalaround the start of $2023.$The Export Import Bank agreed to provide a secured loan for the initial investment of one solar power systemat pre$-$tax cost of debt of $7$ per cent. The banks repayment terms were to be equal to the savings generated.The corporate tax rate was $25$ per cent. Tax rules in Jamaica depreciated solar equipment on a straight$-$linebasis over eight years with $0$ per cent initial allowances in the year of purchase. Given the highly customizednature of the solar power system installation, neither system was expected to have a salvage value$\mathrm{.}100-$Kilowatt SystemThe $100$kW systems $220$ solar panels, two inverters, and all necessary mounting equipment would costUS$$134,757$ to purchase and import to Jamaica net of GCT exemptions. The fee to install the roof racking,solar panels, and electrical equipment to carry power from the roof of JMFs main factory building into the factorys electrical system would be US$$61,216.$ The $100$kW system would be capable of selling electricityback to the grid, which would incur an additional $$400,000$ for licensing and the professional electricalengineering fees required to approve the additional equipment installation required to facilitate net billing.The usage charge savings for the $100$kW system were projected to be $$563,000$ per month in $2023.$ Due tosolar panel degradation, the usage charge savings produced would decrease linearly by $3$ per cent of theoriginal $2023$ savings every year for the project's duration. Demand charge savings would not begin untilthe following year with $$2,140,000$ of savings per year from decreased peak power usage. Like the usagecharge savings, solar panel degradation would also cause the demand charge savings to decrease linearlyby $3$ per cent of the original $2024$ value per year. Foreign exchange savings were expected to be $$50,000$in $2023$ and increase by $2$ per cent each year over the life of the project.JMF would also generate revenue through selling excess power to the utility provider. Given that the solarpower system could generate excess power approximately two days per week, revenue generated throughnet billing for each year would be two$-$fifths multiplied by the electricity usage savings and multiplied bya factor of one$-$fifth. This total accounted for the difference in the price that JMF initially purchasedelectricity versus the price that JPS repurchased electricity. System maintenance would be $$400,000$ peryear beginning in $2023$ and increase by $1$ per cent per year, and insurance would cost $$380,000$ per year forthe projects duration$\mathrm{.}230-$Kilowatt SystemThe $230$kw system would require $510$ solar panels each capable of producing $0\mathrm{.}445$kW as well as twoinverters for a net cost of US$$196,979.$ Installation of the panels and all the necessary electrical equipmentwould cost US$$75,761.$Although the $230$kW system was much larger than the $100$kW system, the $230$kW system was strategicallyoversized relative to JMFs energy usage to capture sunlight throughout parts of the day when the panelsexperienced sub optimal sunlight such as early mornings or late evenings $($see Exhibit $6).$ As a result, the$230$kW system would be capable of saving $$726,000$ per month in usage charges in $2023,$ while the demandcharge savings would be $$2,420,000$ per year beginning in $2024.$ However, the solar panels in the $230$kWsystem would degrade at a similar rate to the $100$kW system, and foreign exchange savings were expectedto be $$70,000$ in $2023$ and increase at a similar rate as the $100$kW system. The maintenance and insurancecosts would be higher on the larger system costing the company $$960,000$ per year in $2023$ and increasingat a rate of $1$ per cent per year and $$728,000$ per year, respectively, for the life of the system. Additional ConsiderationsInstalling the solar panels on the roof of the main factory building would help eliminate one of the mainsources of heat within the factory by absorbing the suns radiation in addition to providing an insulating airpocket between the panels and the roof. Chen contacted the contractors clients who had similar facilitiesand solar panel installations. The clients told him that they experienced temperature reductions of up to $2$degrees Celsius after installing the solar panels.However, installing solar panels on the main factory building would cause production to shut down for aminimum of six weeks. In addition, drilling required for installation of the solar panel mounting systemcould produce metal shavings. The shavings could contaminate the food production machines even ifproduction was shut down. Chen thought about ways to implement the solar power system that did not involve drilling the roof of the main factory building. If the system were to be installed on the roof of oneor more buildings deviating from the proposal, an additional $$800,000$ investment would be required toinstall extra cables to connect the solar panels to the inverters in the main factory building.Additionally, although JMF was a privately held company, entities in Jamaica that pursued an initial publicoffering $($IPO$)$ paid $0$ per cent corporate income tax for the first five years after the IPO, then $50$ per centof the nominal rate for the following five years$\mathrm{.}20$ Thinking ahead, Chen wondered whether the tax breakassociated with an IPO would be favourable or unfavourable for the investment. Quantitatively evaluate the financial viability of the two investment opportunities. Consider the IRR, NPV$,$ and payback of each investment opportunity. Also evaluate the effect of uncertainty of the foreign exchange rate on the investment decision.$$In this case the net operating cash flows after tax can be calculated by using a formula:Net operating cash flows after tax: $($Cash inflows $$ Cash outflows$)$ Taxes $+$ depreciationYearly Cash inflows include:o Usage charge savingso Demand charge savingso Foreign Exchange savings o RevenuefromNetBillingYearly Cash outflows include: o MaintenanceCostso InsuranceTaxes are calculated as: $($Inflows $$ outflows $$ depreciation$)$ tax rateEvery year starting from $2023,$ the net operating cash flows after tax should be calculated based on above formula for $25$ years until $2047.$ Then calculate the present value of each years cash flows using the correct discount or hurdle rate $($after$-$tax cost of debt$).$The after$-$tax cost of debt $=$ Cost of debt$*(1-$tax rate$)$NPV of the project $=$ Sum of the present value of all Net operating CFs after tax$-$ Investments