Assignment #3

Assignment #3 Evaluation of a Cogeneration Project Capital cost: Construction cost                        $80.00 million Commitment fees and financing cost                   10.00 million Construction draw-down period                          18 months Total capitalization                        $90.00 million Financing arrangement: Long-term debt    Per cent to be determined by the borrowing capacity using a = 1.50 Equity capital         Sponsors (local utility and engineering firm):  50% Passive investors:                                              50% Capital is to be depreciated on straight-line basis over 10 years. Debt to be paid back in 10 years in equal amounts Interest rate on debt: 8 per cent per annum Cash flow projections: Assumptions: 1.    Capacity utilization:  90 percent 2.    Prices at the time the plant is placed in service and contracted growth rates Electricity    $45 per megawatt-hour (MWH), annual increase 6% Steam         $4.40 per thousand pounds; annual increase 5% Natural gas    $3.850 per million BTU; annual increase 5% 3.    Predicted volumes at 90 percent capacity Electricity production:    1,700,000 MWH Steam production        1,150 million pounds Gas usage            14,750.1 billion BTU 4.    Operating and other expenses: First year = $6.5 million; annual increase 4%. 5.    Tax rate: 40%. 6.    Residual value of the project (after tax): $70 million The project is to be evaluated for 15 years.  The relevant discount rate for calculating the NPV is 10%. Calculate the NPV and the IRR