Question

Prpject Finance

Oryx Electricity Generation Project (BOOT)

Capital Expenditure during construction period: 174 OMR/MWH (megawatt-hour). Depreciation on straight line basis over ten years such that book value at the end of ten years is zero.

Construction Period - 2 years: 40% in year 1 and 60% in year 2. Interest rate on construction loan is 12% per year. Commitment Fee charged by the bank is 0.5% per annum. (Assume that first year construction cost is spread equally over the 12 months in the first year, and second year construction cost is spread equally over the 12 months in the second year).

After construction the project will generate and sell electricity for ten years.

Revenue 57 OMR/MWH (annual revenue growth 1.5 % base case, can vary between 1.5% to 2.5%). MWH means megawatt per hour. Assume a year has 365 days and day has 24 hours

Input costs plus operating expenditure: 4 OMR/MWH ( annual inflation 1% base case, can vary between 1 to 3%)

Electricity generation capacity: 300 MWH. Expected Capacity utilization 90%.

Tax rate 20%. After ten years the project will be transferred to the government free of charge.

Calculate CFO, EBIT, EBITDA, NPV and IRR for the base case.

DSCR (Debt Service Coverage Ratio) should be more than 1.5 in every year of operation. Sponsors expect a minimum Equity IRR of 20% and Lenders expect a minimum Debt IRR of 14%

Estimate the optimal capital structure for this project ?

Sensitivity Analysis: Show the behavior of CFO, EBITDA and Debt Service Coverage Ratio under different scenarios. Present using graphs.

Prepare a three page report showing your main findings and conclusions. Attach printed copies of Excel worksheets and graphs.

Answer 1

1) Pls provide full formof CFO

Since all units are in MWH, for simplicity, we do not change that.

Capital Expenditure in first year:40% of174 * 270 (number of MWH generated in an hour)

Capital expenditure in second year: 60% of 174*270 (number of MWH generated in an hour)

Revenue Generated in first year: 57*270 and 1.5% increase there on. Similar case with operating expenditure

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Year 11	Year 12
Construction	18792	28188	15390	15620.85	15855.16275	16092.99019	16334.385	16579.40082	16828.09183	17080.51321	17336.72091	17596.77172
Revenue
Input + operating expenditure			1080.0	1123.2	1168.1	1214.9	1263.4	1314.0	1366.5	1421.2	1478.1	1537.2
EBITDA			14310.0	14497.7	14687.0	14878.1	15070.9	15265.4	15461.5	15659.3	15858.7	16059.6
Depreciation			4698	4698	4698	4698	4698	4698	4698	4698	4698	4698
EBIT			9612.0	9799.7	9989.0	10180.1	10372.9	10567.4	10763.5	10961.3	11160.7	11361.6
Interest
Tax			1922.4	1959.93	1997.81	2036.03	2074.59	2113.48	2152.71	2192.26	2232.13	2272.32
PAT			7689.6	7839.7	7991.2	8144.1	8298.4	8453.9	8610.8	8769.0	8928.5	9089.3
			4698	4698	4698	4698	4698	4698	4698	4698	4698	4698
	-18792	-28188	12387.6	12537.7	12689.2	12842.1	12996.4	13151.9	13308.8	13467.0	13626.5	13787.3
IRR	22%

DSCR to be maintained at 1.5 and hence (interest + Principal Payment (1-t) should be less than 1.5 EBIT

BY trial and error method we can find the optimal ratio of Debt to equity.