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Finance 410: Project 2 Fall 2017 Print Name Instructions: You must use Excel to solve all problems, and email to me on or before 11/28/17 by 9:30 am. Your spreadsheet should allow for changes in production rates, processing costs, gas prices, and WACC. You may work in groups of two or three. There are 100 points possible. Please set up your spreadsheet similar to the one on page 501 of your text. 1. TXC Energy Distributors, a natural gas and gas products company, is analyzing a gas purchase project. The projections were provided by a field engineer, and the project is expected to last 10 years. The company's cost of capital is 13%, and the projections from the field engineer's report are as follows: "The investment requires two components. The first is the cost to lay the natural gas pipeline. The equipment costs $1,100,000 and the installation is $100,000. The next cost is the $145,000 required increase in net working capital. The well is expected to produce 970,000 cubic feet (970 MCF) per day of natural gas during year 1 and then decline over the remaining nine-year period. The natural gas production is expected to decline by 20% per year after year 1. Note that we expect to operate 365 days per year assuming there are no maintenance shut downs. Along with the additional expenditures for the pipeline, the company has three additional sets of expenses. The first is a contracted fee consisting of 30% of the wellhead natural gas market price which must be paid to the producer (i.e., if the wellhead price is $3.00 per MCF, the fee is $.90 MCF). In addition, gas compression and processing costs total $0.40 per MCF. The final cost is a fixed cost of $7,000 per year for insurance, etc. The equipment is expected to have a salvage value of around $30,000 after 10 years and working capital is expected to be 15% of annual revenue (and then working capital is recovered at project end). Also at project termination, there is expected to be reclamation costs of $15,000. " A) (5 points) What is the initial outlay for this project? B) (5 points) What is the terminal value cash flow? C) (25 points) Calculate the incremental net cash flow for each year from year 1 to 10. Although the project is expected to last 10 years, depreciation is calculated using the 7-year modified accelerated cost recovery system (MACRS). Note: You may use the D) (22 points) What is the NPV and IRR of the project? This is considered the base case for part F below. See problems E and F on back of page