Capital cost:   Construction cost $85.00 million Commitment fees and financing cost 5.00 million Construction draw-down period 18 months   Financing arrangement:   Long-term debt Per cent to...

Capital cost:

Construction cost $85.00 million

Commitment fees and financing cost 5.00 million

Construction draw-down period 18 months

Financing arrangement:

Long-term debt Per cent to be determined by the borrowing capacity using α = 1.20

Equity capital Sponsors (local utility and engineering firm): 40%

Passive investors: 60%

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:

Assumptions:

1. Capacity utilization: 95 percent

2. Prices at the time the plant is placed in service and contracted growth rates

Electricity $45 per megawatt-hour (MWH), annual increase 5%

Steam $4.00 per thousand pounds; annual increase 5%

Natural gas $3.50 per million BTU; annual increase 4%

3. Predicted volumes at 95 percent capacity

Electricity production: 1,550,000 MWH

Steam production 1,060 million pounds

Gas usage 14,700.1 billion BTU

4. Operating and other expenses:

First year = $6.5 million; annual increase 5%.

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