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Suppose you are required to analyse the financing cash flows for UQ solar farm in Warwick. The investment cost of the project is 125 million
Suppose you are required to analyse the financing cash flows for UQ solar farm in Warwick. The investment cost of the project is 125 million dollars and UQ has borrowed the full amount from Commonwealth Bank at an annual interest rate of 3.5%. The loan term equals the project life of 25 years. The solar farm is estimated to generate 120,000 megawatts (1 megawatt = 1000 kilowatts) of energy each year and will be sold to the grid at a fixed Feed-in-tariff rate of 15 cents per kilowatt. Assume a 5% discount rate, the NPV of the net cash flows of UQ solar farm is $ million and the IRR is 9%. If the loan interest rate will be increased by 2% p.a. starting from year 6. The NPV will be changed to $ million and the IRR will be changed to 96. By using the IRR rule, UQ should (accept/reject) the project. In your answer, decompose the principal, interest and net cash flow for UQ using a conversion factor of 100,000. Assume there are no taxes paid on this project. (hint: calculate the remaining principal owed on the remaining 20 years of the loan)
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