The company is considering investing in a wind energy project in a foreign country. The wind energy investment project consists of two phases.

Phase-1 investment involves building an onshore wind farm with a capacity of 500 MW. The onshore wind farm requires a project development and maturation stage (including geographic studies and necessary permit applications) in year 0 and additional geographic studies in years 1-5 (bird collision studies). In year 0, the onshore wind farm is constructed, turbines purchased, and the power grid connected. The onshore wind farm's fixed assets are depreciated using a straight-line method over the 15-year wind-farm life. At the end of year 15, there is a negligible salvage value. From year 1, the onshore wind farm is expected to operate and generate electricity. Besides, the operation requires an initial investment in net working capital in year 0 that amounts to a fixed rate of year 1's expected gross profit. The required investment in NWC can be fully recovered at the end of the operation (year 15).

After five years of experience in Phase 1, the management can consider an expansionary Phase 2 investmentadding to the onshore wind farm capacity by 750 MW. No additional project development and maturation stage is required. Phase 2 involves capital expenditures in year 5 (farm construction and connection, purchasing turbines), and the expanded part of the wind farm has 15 years of operation. At the end of year 20, there is a negligible salvage value. For accounting purposes, the onshore wind farm expansion's fixed assets are depreciated using a straight-line method over 15 years. Like Phase-1, the operation requires an initial investment in net working capital up to a fixed rate of the expected year-1 gross profit, which can be fully recovered at year 20.

The market team has identified that the electricity price is a significant risk factor. Although the wind farm's capacity can be fixed due to the business volatility, the future gross profits are uncertain.

See the next section for more details. Project Details

Country	Ukraine
Business risk volatility	65%

Phase 1 wind farm details (life: 15 years)
Expected cost or revenues	U.S. $ million / year	Year(s)
Project development and maturation costs	35	0
Turbines & wind farm construction (NO NEED)	0	0
Bird collision studies	10	1-5
Expected annual gross profit (NO NEED)	0	1
Operations and maintenance costs / gross profit	15%	1-15
Gross profit decline rate	0.0%
NWC/expected gross profit in year 1	10%	0
Phase 2 wind farm details (life: 15 years)
Expected cost or revenues	U.S. $ million / year	Year(s)
Turbines & wind farm construction (No NEED)	835	5
Annual gross profit (No NEED)	200
Gross profit decline rate (No NEED)	0.0%
Operations and maintenance costs / gross profit (No NEED)	10%	6-20
NWC/gross profit in year 6 (No NEED)	20%	5

Provide an estimate for the capital expenditure of constructing a wind farm of this size and the gross profits it is expected to generate. Conduct the analysis to both Phase 1 and Phase 2. Support your estimates by researching competitors in this field with references to the sources.

Using data from the EDGAR Annual report and Annual Information filings for the company, calculate and analyze the current (the most recent financial year) free cash flow to the firm and equity. State the group's assumptions and data sources for the free cash flow analysis inputs. Present a short discussion regarding the inputs the group eventually chooses.

Analyze the company's capital structure, including an overview of its financial instruments for funding purposes.

Calculate the current post-tax WACC for the company. The group needs to estimate the market value of debt and equity, the risk-free rate, the market risk premium, the company beta, and the costs of debt and equity for the WACC calculation.

For all inputs to the WACC calculation, the report must state the assumptions and sources of data. Present a short discussion regarding the inputs the group eventually chooses.

The group should derive the project cost of capital, reflecting the business and country-specific risks. The report must state the assumptions and sources of data. Present a discussion regarding the cost of capital and its derivation.

Calculate the project FCF and estimate Phase-1 and Phase-2 NPVs.

The report must state the assumptions and sources of data. Present a discussion regarding the outcomes and whether the company should invest in the project and expand it.

The management team has the option to expand Phase-1 in year 5. The valuation of Phase-2 reflects the added value of this call option.

Construct the binomial tree for the path of gross profits as illustrated in the graph below. Assume that the annual gross profits are equally likely to increase or decrease by (business risk volatility) relative to the previous year's level.

Based on the estimates you derived in (3.1) for the expected gross profits, construct the decision tree and value the Phase-2 investment using the decision tree analysis. The report should include

1. An explanation for the rationale of this approach;
2. Discussion of the parameters' values in the formulas;
3. A Drawing of the decision tree with sufficient information;
4. An explanation of the optimal strategy;
5. The calculation and final results;
6. Discuss the real-option valuation versus the DCF approach results.

Use the Black-Scholes formula to calculate the value of Phase-2. The report should include

1. An explanation for the rationale of this approach;
2. Discussion of the parameters' values in the formulas;
3. The calculation and final results;
4. A Discussion and comparison of the previous results (decision-tree results and DCF results).

The given business risk volatility () is also the standard deviation of returns.

A significant investment in a foreign country involves dealing with risks and costs that the management team needs to learn and adapt to overtime. Identify significant risk factors that may substantially impact the outcome of the investment project. To help the management team review the project's valuations, conduct at least one additional risk analysis (e.g.,break-even, sensitivity, or scenario analysis). Motivate the analysis and provide support for the assumptions and setting.

Discuss and provide evidence of the company's business strategy. Answer whether this project is compatible with its business strategy and risk appetite. Discuss the project's impact on the company's risk profile.

Based on the company's analysis, its strategic focus, growth strategy, and project analysis, make recommendations to the corporate treasurer. The group's recommendation should discuss the return on equity, free cash flow to the firm and equity, the funding of the firm's capital structure, and its cost of capital. All recommendations should be supported by the analysis performed throughout the report.