Evaluation of a Cogeneration Project
Construction cost $80.00 million
Commitment fees and financing cost 10.00 million
Construction draw-down period 18 months
Total capitalization $90.00 million
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:
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
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