Chapter 14, Problem 045 Virginia Natural Gas Company (VNGC) must provide a regul

Question

Chapter 14, Problem 045 Virginia Natural Gas Company (VNGC) must provide a regulation and metering unit to a new subdivision near Norfolk. They already own right-of-way and must now install the equipment at a cost of $210,000 with operating and maintenance costs of $16,000 per year. The useful life of the equipment is 25 years with no salvage value after that time. VNGC borrows 48 percent of their capital, and the rate is 8.5 percent over 25 years with uniform principal payments plus interest on the remaining principal. Tax depreciation follows MACRS-GDS (20), and financial depreciation is straight line in equal amounts over the full 25 years. The effective tax rate is 40 percent, and the WACC is 11 percent. Click here to access the TVM Factor Table Calculator What is the revenue requirement for the third year?$ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is 3%. LINK TO TEXT What is the return on equity capital? Carry all interim calculations to 5 decimal places and then round your final answer to 1 decimal place. The tolerance is ±0.2. LINK TO TEXT What is the present worth of the revenue requirements over the entire 25 years? $ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is t3%

Explanation / Answer

$ Equipment cost               210,000 Useful life of Equipement (years)                          25 Depreciation                    8,400 Operating and Maintenance cost (per year)                 16,000 Borrowings               100,800 Interest rate (%) per year 8.50% Equity Capital Employed               109,200 Cost of Capital (WACC) (%) 11% Cost of Capital (WACC) ($)                 23,100 Schedule of repayment of borrowings Year Principal (Opening Balance) ($) Principal repayment ($) Principal (Closing Balance) ($) Interest ($) Total payment of interest and principal repayment ($) 1                                                            100,800                    4,032                       96,768        8,568.00                          12,600.00 2                                                              96,768                    4,032                       92,736        8,225.28                          12,257.28 3                                                              92,736                    4,032                       88,704        7,882.56                          11,914.56 Ans 1 Revenue requirement for 3rd year ($) Repayment of Principal and Interest           11,914.56 Depreciation                    8,400 Operation and Maintenance                 16,000 Return of Capital                 23,100 Total cost excluding tax           59,414.56 Taxation (Effective tax rate 40%)         23,765.824 Total Revenue ($)         83,180.384 Ans 2 Cost of capital ($)                 23,100 Interest on borrowings for 3rd year              7,882.56 Return on Equity capital 15,217.44 Return on Equity capital (%) 13.93538%

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