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CFM3 Ch 10 Minicase The Power to Cool Off in Florida Additional Case Notes
Objective: This case demonstrates the use of NPV, IRR, and financial ratios for evaluating a capital budgeting project. ase !iscussion: The Indianto"n ogeneration Project involved the construction and operation of a coal#fired plant in $artin ount%, &lorida, that produces electricit% and steam. It's called a cogeneration project because it produces (cogenerates) t"o forms of energ%, electricit% and steam, from the same production facilit%. The capital cost "as appro*imatel% +,,- million. It has an electric generating capacit% of ..- mega"atts (net) and a steam capacit% of /,0,--- pounds per hour. The project's electricit% revenue has t"o parts: one pa%ment for electric capacit% and the other for the electric energ% it sells. The project's financing consisted of +1.- million of 23 4PR interest rate debt and +/5- million of e6uit%. The debt matures .- %ears from the date it "as issued (the last %ear of the projected &4Ts) and re6uires e6ual annual sin7ing fund pa%ments of +./.0 million beginning in %ear // (%ear /- of the projections). !epreciation is straight line to 8ero over 9- %ears. The ta* rate is 5-3. The case provides the operating data in the case to estimate the &4Ts for the project. :uestions ; $ethodolog%: /. <stimate the project's &4Ts for each of the .- %ears using the case information and the <*cel template. 9. =sing the ,./03 >4 cost of capital given, and assuming that the project's assets have a 8ero salvage value, compute the project's NPV and IRR. The +,,million project cost is the initial (time 8ero) cash flo". To find the IRR of the project, use a ?guess@ interest rate in <*cel higher than the >4 . .. The debt "as issued a %ear before the project "as completed. alculate the interest coverage ratio and cash flo" coverage ratio for each of %ears /- (the first %ear of the sin7ing fund, %ear // of the debt) through 9-. ABO> CO=R >ORD. Bint: >hen the project starts ma7ing sin7ing fund pa%ments, annual interest e*pense "ill decrease.

5. >ill the project be able to meet its annual debt service obligationsE <*plain %our reasoning.

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