The Report and associated Excel spreadsheet should be submitted y 10^th of December

A wind farm developer has obtained planning permission to build a cluster of nine 3000kW turbines. The file Wind-Data.xlsx provides the basic data on capital and operating costs etc for each turbine.

Government has scrapped all subsidies for onshore wind, so revenue from the project will come only from sales of electricity to the wholesale electricity market only. Average wholesale electricity prices over the last few years have been around 50 /MWh.

Company profits from the project will be taxed at standard corporation tax rates. Taxable income in any year is net cash flow minus capital expenditure depreciation allowances, i.e. all operating and maintenance costs are tax deductible. Capital expenditure depreciation allowances are calculated from the straight line depreciation of the capital expenditure over the first 6 years of the operation of the turbines, i.e. 1/6 of the development expenditure can be set off against tax in any year.

Initial work on site has revealed that there it may be possible to build more than 9 turbines on the site (although planning permission would have to be applied for). The turbines have an expected economic life from 25 years to a maximum of up to 30 years.

The government has recently changed the regulations on wind farm decommissioning. The company has estimated that these changes effectively increase decommissioning costs from 5% to 15% of the original capital costs. All decommissioning costs are tax deductible.

The company is currently all-equity financed. Currently the company has evaluated the risk free rate of return rate as 3% and the expected return on Market portfolio (FTSE 100 Index) is 10%. The market beta for the Energy Company is 1.2.

Assignment Task

1. Using the information in Wind-Data.xlsx, build a Spreadsheet model to obtain the NPV (plus any other output values (metrics) you feel are useful) of the wind farm project. (For this case you may ignore inflation and treat all values in the spreadsheet as if they are in real terms)
2. Calculate the LCOE
3. Construct a Tornado chart for at least three input variables.
4. Examine how your model and results will change if the project is finance by both equity and dept.
5. Based on your model and results write a 1000 word report. In you report you should also address the following questions:

• What is the impact on the developer of the increase in decommissioning costs?
• What is the break-even electricity price for the developer (LCOE)?
• What are the main risks to the developers returns?
• How the profitability of the project will be affected if the project is financed by equity and dept
• What options might the developer consider to increase returns?