Financial Proposal - Need Help
lasawn1
case_for_project_sunshine_power_inc..docxSunshine Power, Inc
Sunshine Power, Inc. has been asked to create a solar field on a Caribbean island (fictitious situation and data). The Island government will provide the land. Sunshine Power will provide all the solar power generating equipment, auxiliary storage for nights and for days when sunlight is not available, and to operate the solar power field. Sunshine Power does not have any power generating faculties, of any type, on the island at present.
The compensation to Sunshine Power will be $.65 per kilowatt hour (kWh) in year 1, and decrease by $0.05 per year until year 7 when it will be $0.35 per kWh. This $0.35 is about one half of their current cost of oil generated power. It will stay constant at $0.35 for the remaining years of the contract.
The expected demand is expected to average 2,000,000 kWhs per year in year 1 and increase 10% each year thereafter.
The operating costs of the solar field are estimated at $.02 per kWh.
The annual expenses for managing the solar field are $180,000 for Salaries and Benefits, $12,000 for administrative costs, $80,000 for Maintenance, $120,000 for security, and $50,000 for insurance coverage for damage due to wind, water and other natural calamities. These costs are forecasted to be increase by 10% in the 6th, 11th and 16th years of the contract.
The upfront investment cost for Sunshine Power is estimated at $2,500,000. It will be depreciated using 20-year MACRS. Do not apply the half-year depreciation rule in year 20 (the effect would be miniscule).
Every five years, in years 6, 11, and 16, an added investment of $250,000 is to be made to replace hardware as needed and to increase capacity. This is to be treated as an expense in the year in which it is incurred.
Income tax will be taxed at 15%. The capital gains tax rate is 20%. Tax credits, if any, from this project can be used to offset taxes from other projects of the company.
The contract for the project will be for 20 years at which time Sunshine LLC will receive $1,000,000 if the project is not renewed.
If this contract is successful, many more are possible on other islands or near major cities on larger islands.
From a financial perspective, determine if the project be undertaken if Sunshine Power uses a MARR of 15% annually? Do this from the perspective that Sunshine’s contract is terminated at the end of year 20.
