1. Too Little Power (Pty) Ltd is contemplating building an extension to their power plant due to current constraints in their supply chain. The company has engaged you to assist them to assess them to determine if the contemplated project makes financial sense. You have established the following:

• The plant is projected to cost R500m in total and will be secured through two term loans: the first is one of R300m from the Development Bank at 9% per annum, and the second is one of R200m from Standard Bank at 8,5% per annum.
• The loans will be drawn down in total at the beginning of the 2 year-project build. The interest starts to accrue on the loans from the beginning of year 3 and is payable at the end of each year in one payment. The capital is repayable in one bullet payment at the end of 5 years from the beginning of the project.
• The company has managed to secure off-take agreements with local municipalities. They will take R200m worth of supply per annum starting at the beginning of year 3, and growing by 10% per annum compounded to year 5. The default rate of municipalities is estimated at 5% per annum.
• Direct costs are anticipated to be 40% of revenue and other overheads will be R20m per annum in year 3, growing at a compounded rate of 7% per annum.
• Tax write offs on equipment are 5% per annum and the corporate tax rate is 30%. The full investment will be used to buy and commission capital equipment.
• Working Capital movements are expected to be negligible year-on-year.
• The cost of capital is estimated to be 10%

Please answer the questions below:

1. From which year will interest be paid to the banks? What is the interest bill per annum and for how many years will interest be paid? (3)

1. What is the net revenue projected to be in year 4 from this project? (2)

1. What is Direct Costs projected to be in Year 5 from this project? (1)

1. How much tax relief will the company get from this capital investment in Year 3? (2)

1. Compute the tax the company will pay in Year 4 if this is their only investment and trading activity (i.e. you can ignore anything else the company may be involved in). Show all workings as marks are allocated for the workings. (8)

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2. Too Little Power has secured a firm off-take agreement. 
3. What is another name for this type of contract? (2). 
4. Is the buyer obligated to take the full amount as per the contract in this case? (1). 
5. Does a contract like this increase or decrease uncertainty for investors? (1).

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2. On the assumption that the off-take agreement in this situation is a take or pay agreement, answer the following questions:

1. The customer only requires R150m worth of power from Too Little Power in Year 3. How much is the customer obligated to pay Too Little Power at the end of Year 3? (1)
2. If the customer uses and pays for R150m in Year 3 and R180m in Year 4, how much are they obligated to pay for at the end of Year 5, assuming that the agreement comes to an end at the end of Year 5? (4)
3. During Year 4, Too Little Power is only able to supply R120m worth of power due to inefficiencies in their processes. How much is the customer obligated to pay Too Little Power in Year 4? (1)
4. Too Little Power argues that the reason they could not produce more than R120m worth of power in Year 4 was due to a strike in their power plant. Discuss whether they would be able to successfully argue to a court that the new level for the contract should not adjusted to R120m going forward. (4)