Suppose you have been requested to evaluate a solar farm investment in Warwick. The investment cost of the project is 125 million dollars. Suppose the investor in the project will borrow half of the funds as part of the project at an annual interest rate of 3.5%. The life of this loan is equal to the project life which is expected to be 20 years. In addition to the loan, the investor will also take out a balloon loan in years 1-5 worth 1.5 million to cover any unexpected costs. The balloon repayment is 20% of the initial balloon loan and the rate of interest on the balloon loan is 5.5%. The solar farm is estimated to generate 120,000 megawatts (1 megawatt = 1000 kilowatts) of energy each year and will be sold to the grid at a fixed Feed-in-tariff rate of 15 cents per kilowatt. Assume a 5% discount rate, the NPV of the net cash flows of the solar farm is $ %. million and the IRR is million and %. By using the IRR rule, the investor should If the loan interest rate will be increased by 2% at the start of year 11. The NPV will be changed to $ the IRR will be changed to (accept/reject) the project. In your answer, decompose the principal, interest and equity for the investor using a conversion factor of 100,000. Assume there are no taxes paid on this project. (hint: calculate the remaining principal owed on the remaining 10 years of the loan) Provide your answers to two decimal places. Do not include any commas (,) "$" or "%" in your answers. Ensure you show all your working in your spreadsheet.
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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