Assignments1. In an Excel file, create a pro-forma cash flow schedule based upon the details listed above, report a) the project’s unlevered pre-tax return, b) the levered pre-tax return, c) the unlevered after-tax return, and d) the levered after-tax return.2. Create a PowerPoint deck, in no more than 2 slides, make a recommendation to your CFO with the understanding that the company’s current after-tax equity return hurdle is 12.0%. Discuss briefly the risks associated with the investmentSolar Facility EvaluationYou have been asked by your CFO to evaluate a potential equity investment in a solar power plant. He would like you to provide the pre-tax and after-tax returns for the facility on both an unlevered and levered basis based upon a purchase price of $40,000,000.Solar Power Plant DetailsThe power plant’s sponsor has negotiated an off-take agreement with a Community Choice Aggregation to sell the power (and all RE certificates) at $130 / MWh for 20 years, with an annual escalation factor of 2.5%. An independent engineer has studied the insolation history for that region and has determined that the median available sunlight in that region can produce 2,000 kWh annually for each kilowatt of installed capacity. The plant has an installed capacity of 10,000 kW. The engineer has also determined that the facility is scheduled to degrade at a rate of 0.50% per annum.An independent consultant has reviewed the potential operating expenses for the project and has indicated thata. O&M expenses should cost $0.015 per installed watt per year, escalating at 2.0% per yearb. insurance expenses should be $100,000 per year, declining by 1.0% per yearc. the site lease will be $75,000 per year, fixed.The sponsor has qualified that the project will be eligible to receive a 30% grant from the US Treasury (calculated as a % of the gross purchase price) and that 85% of the purchase price will be eligible for a depreciable life of 5 years (for the purposes of this analysis, assume that the rate of depreciation will be level over the 5 years).Financing DetailsYour CFO has given you the following details to model the cash flows associated with the debt:Debt service coverage ratio = 1.30xAll-in rate = 7.00%Debt term = 18 yearsNote that the project company is not itself a taxpayer (as all income and tax liability will pass to the project company’s owners), so cash outlays for taxes expenses should not be removed from the cash flow used for debt1.This test includes assumptions that are not in the market or not valid at this moment. i.e. Treasury grant concept is no longer valid. The assumptions here are for simplicity of the model test.
