Module 8 Assignment (60 points) Evaluation of a Cogeneration Project Capital cost: Construction cost $80.00 million Commitment fees and financing cost $5.00 million Total construction cost $85.00 Construction draw-down period 18 months Financing arrangement: Long-term debt Per cent to be determined by the borrowing capacity using = 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. You have to decide the amount of debt financing by keeping in mind that it has to be within the feasible debt limit as determined by the value. Calculate the IRR for both sponsors and passive investors.