Finance Homework

1 AF 631 : Environmental Accounting and Finance Spring 2017 Assignment II I – Renewable Energy Investments Analysis and Valuation Submit your response s by email , including the excel file. The submission deadline is March 22.

Case Study Fox Islands Wind Project (A) Th is case provides an example o f how tax incentives and regulatory requirements are important determinants of value and impact financing decisions on i nvestments in renewable energy.

Assume a required rate of return by equity investors equal to 15%. 1. Estimate the N et Present Value (NPV) of the Fox Islands Wind Project based on cash flows from business operations . In your analysis you should ignore cash flows related to the financing o f the project or tax incentives . Use the weighted average cost of capital to discount the cash flows.

2. Estimate the Internal Rate of Return (IRR) for the project. 3. Estimate the N et Present Value (NPV) to equity investors. Co nsider the effect of the incenti ves to renewable energy mentioned in the case. Notice that investors can opt by either the Production Tax Credit (PTC) or the Investment Tax Credit (ITC). 4. Estimate the Internal Rate of Return (IRR) for equity investors. 5. What is the value of the PTC for equity investors?

6. What is the value of the I TC for equity investors? 7. As mentioned in the case, “ Under IRS guidelines, the equity investors were allowed to depreciate most of project costs using a five -year, double -declining -balance depreciation method. According to tax experts, this generally allowed 90 -95% of the cost of a wind project being depreciated within six years .” Estimate the value of this accelerated depreciation regime for equity investors. 8. Estimate the NPV to equity investors assuming that their cash flow is determined by operating cash flows availability, instead of a fixed dividend of $25,000 per year . 9. FEIC is a non- profit entity and the goal of the project was to reduce the cost of electricity to the island s’ residents, rather than to obtain a profit. Assuming that this was a for -profit investment , and according to your previous estimation of value , could there be a profit for the developer or sponsor of the project? How much would this profit be? 10. Comment on the results . Would the project be profitable without the incentives in place?

Will FEIC be able to reduce the price of electricity for the residents of Fox Islands?