You are an energy company looking to decarbonize small communities that are currently reliant on diesel generators for their electricity. The remote town of Burtonville currently is electrified by a set of diesel generators that are nearing the end of their life. You are preparing a proposal to replace the generators with a cleaner alternative. The town needs generation with a peak power capability of 1 MW. You are considering three options.

Option 1: Replace the generators with new diesel generators

Capital cost: $750,000

Lifetime of generators: 20 years

Operating costs:

$1,500,000 fuel costs for year 1, growing at $50,000 per year

$200,000 in maintenance costs per year, growing at $10,000 per year

CO2 Emissions: 3,100 tonnes per year 1

Option 2: Run of river hydro-power, with a diesel generator backup for low flow seasons

Capital cost of hydro generator: $1,500,000

Capital cost of diesel backup generator: $500,000

Lifetime of both generators: 50 years

Operating costs:

Maintenance, hydro generator: $100,000 in year 1, growing 3 percent per year

Fuel, diesel generator: $300,000 in year 1, growing at $10,000 per year

Maintenance, diesel generator: $20,000 per year, constant

CO2 Emissions: 620 tonnes per year

Option 3: Wind turbines with an electrolyser and backup fuel cell generator

Capital cost: $3,800,000

Lifetime of turbine and fuel cell generator: 25 years

Operating costs: $340,000 in year 1, growing at 4 percent per year

CO2 Emissions: None

Before assessing this project, you evaluated a different electrification projects and found them on average providing a 12% rate of return. Your company went looking for investors and was offered the following two packages from different investors:

Financing package 1: A consortium of pension funds offers to fund the project as a spin-off venture. They will provide 80% of the capital cost funding, and expect an 9% annual dividend. The remaining 20% of the project funding will come from internal funds that could be used for other projects.

Financing package 2: The project could be funded by a number of bank loans. One bank is offering up to $1,000,000 at 5%, a second is offering up to $1,500,000 at 6%, and a third will provide up to $5,000,000 at 8%.

(2) a) What is the WACC for each financing package option?

(1) b) Which package would you choose to fund the project?

(1) c) What is your MARR? (4) 2 Evaluate the three potential replacement projects using a worth analysis. Use the MARR you determined above.

(6) d) Given the MARR you determined above, which option would you recommend?

(1) e) How would changing the financing option change your recommendation?

(7) The government is planning to introduce a carbon tax of $60 per ton for the first year, increasing by $12 per year over for fifteen years, capping at $240 per ton.

(2) f) What is the new worth for the Run of River hydro-power option if this tax is implemented?

(1) g) Would this change to the carbon tax alter your recommendation? Why or why not?

(3) Suppose the power authority is offering to pay the power provider for Burtonville $450,000 per year, with a 2 percent increase per year. Suppose your cost of borrowing money is the lowest WACC you determined from the two financing options, and assuming you can invest any profits you make at the MARR you determined above.

(3) h) What is the MIRR of the wind turbine and fuel cell generator option?

(3) The federal government is offering a subsidy for CO2 reducing projects like this. They will cover up to 50% of capital costs to a maximum of $500,000, with no repayment of the funds required. It will take a lawyer to draw up the application, and once approved you will be required to provide quarterly status reports to the government until the project is built, plus a final report and accounting of the grant for the project.

(2) i) What is the cost of capital for this subsidy? Do not perform any calculations but speak to the kinds of costs that might be involved with this subsidy.

(1) j) How might your MARR be impacted by these costs?

SOMEONE PLEASE ANSWER IT CORRECTLY