Sunshine Power LLC Case Study

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• Perform modeling analysis and preliminary report

Sunshine Power LLC has been asked to create a solar field on a Caribbean island (fictitious data). The Island government will provide the land. Sunshine Power will provide all the solar power generating equipment, auxiliary storage for nights and for days when sunlight is not available, and to operate the solar power field.

The compensation to Sunshine Power, LLC will be $.65 in year 1, and decrease by $0.05 per year until year 7 when it will be $0.35 per kilowatt hour (KwH) that is one half of their current cost of oil generated power of about $.70 per KwH. It will stay constant at $0.35 for the remaining years of the contract.

The expected demand is expected to average 1,000,000 KwHs per year in year 1 and increase 10% annually thereafter.

The operating costs of the solar field are estimated at $.02 per KwH.

The annual administrative costs for operating the solar field are $180,000 for Salaries and Benefits, $12,000 for administrative costs, $80,000 for Maintenance, $120,000 for security, and $50,000 for insurance coverage for wind and water damage. These are considered fixed at these amounts for the duration of the contract.

The upfront investment cost for Sunshine is estimated at $1,500,000.

Every five years, in years 5, 10, 15 and 20, an added investment of $200,000 is to be made to replace hardware as needed and to increase capacity. Both the original investment and the replacement and enhancement investments are to be separately depreciated over 5 years using straight line depreciation. Obviously, depreciation is not relevant for the year 20 investment.

No Income tax will be assessed by the island government but any income will be repatriated to the U.S. and be taxed at 15%. Tax credits from this project, if any, will be used to offset taxes from other projects of the U.S. based company.

The contract for the project will be for 20 years at which time Sunshine LLC will receive $500,000 if the project is not renewed. In this analysis, consider this $500,000 as a salvage value that is subject to U.S. capital gains tax of 10%. Note that the $200,000 to be invested in year 20 will not have been depreciated.

If this contract is successful, many more are possible on other islands or near major cities on larger islands.

From a financial perspective, determine if the project be undertaken if Sunshine LLC desires an EAR of15% annually?