I need help with Part B, I have already completed part A. Suppose you have an op

Question

I need help with Part B, I have already completed part A.

Suppose you have an opportunity to invest in a start-up company that builds solar power factories. A newly proposed facility just outside of Columbus would generate about 120,000 MWh (1 MWh = 1000 KWh), and cost $25 million to install.

A) If ENGIE-Axium, the new energy "partner" for Ohio State University, agrees to put up the entire $25 million for the installation of this solar facility, providing Ohio State University gets the entire 120,000 MWh at no additional charge for its sustainability efforts, is this a good deal for the university? Assume the market price for electricity is $48 per MWh and there is a 5-year project horizon. Evaluate this decision using a 3% and a 7% discount rate. For this problem, assume that the costs of installing the solar panels occur at time 0, and the benefits occur at the end of each subsequent year (end of year 1, end of year 2, etc.). The 5 year horizon implies that you only need to evaluate the gains of the solar project over a 5 year period. Solar panels obviously will provide benefits in the future if they remain installed, but you should ignore years beyond the 5th year for this analysis.

Answers to A: NPV @ 3% = 1,338,945.05
   NPV @7% = 1,292,395.11
* So, it is beneficial at 7 percent

B) Suppose ENGIE-Axium, on behalf of Ohio State University, sells the resulting renewable energy credits from this project on the market at the current price of renewable energy credits in Ohio of $5 per MWh. Show whether and how this changes the benefits and costs of this potential investment in solar power at both interest rates?

Explanation / Answer

B.) Receipts from Solar creidts sale=$5x120,000 =$600,000

Annual Social Benefits per Year=$48x120,000 =$5,760,000

For a 5-Year period horizon and discount rate of 3%,

NPV =-25,000,000 + (5,760,000+600,000)x{(1-(1+0.03)-5)/0.03}

        = -25,000,000 + 29,126,938

        = 4,126,938

Since, the NPV is >0, the project should be accepted.

For a 5-Year period horizon and discount rate of 7%,

NPV =-25,000,000 + (5,760,000+600,000)x{(1-(1+0.07)-5)/0.07}

        = -25,000,000 + 26,077,255

        = 1,077,255

Since, the NPV is >0, the project should be accepted.

The impact of selling Energy credits is that the project which was earlier getting rejected at discount rate of 7% due to negative NPV is now getting accepted by same criteria. NPV from the project will increase due to increase in benefits resulting from additional cash flows.

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