As part of the Company's 10 Year Corporate Plan (2022 - 2031), the Board of Directors has approved investment capital for building a new 1,500 megawatt power plant in Philippines in October 2021. In turn, the Board of Directors requests both financial advisors and engineers to estimate real cash flow (RCF) and, in turn, net present value (NPV). Key assumptions are displayed as follows:

Technical Assumptions:

• Electricity generating = 1,500 megawatt
• Initial capital investment (2 years) = 300 million US $ in year 0 and 300 million US $ in year 1
• Lifetime 8 Years in operation
• The firm can start selling electricity from year 2
• Operating expenses (e.g. salary, insurance, inputs) = 150 million US $/year estimated for year 0 with 2% increase every year from year 1 - 9
• Since the new project will generate electricity in year 2; hence, operating expenses will exist from year 2 - 9

Economic Assumptions:

• Company revenue = 1 million US $/day or 360 million US $/year estimated for year 0 with 2% increase in price every year from year 2-9 (i.e. you need to calculate NPV (with inflation)).
• Real discount rate equals 7% (k_r = 7%) and inflation (i) = 2%.
• Equal depreciation of capital investment from year 2 - 9.
• Tax rate = 20% of taxable income.
• Two key drivers of sales are: (1) GDP growth rate around 5 - 7% from years 2-9 and (2) electricity demand will be upside trend from years 2-9.

Creditworthiness Assumption:

• The Company's credit rating is excellent with low possibility of credit default.

After finishing RCF and NPV estimation, you should recommend the Board of Directors to make a decision either to carry out or not to carry out the expansion project?

Answer rating: 100% (QA)

To estimate the real cash flow RCF and net present value NPV of the new power plant project we need ... View the full answer