Summary

PowerCo: Your Analysis and Report Introduction This assignment deals with the feasibility and viability of the project considered by PowerCo. The project is about building up a generator, which would be used to produce electricity. In the beginning two years, the generator will be built… Read TextPreview

- Subject: Other
- Type: Essay
- Level: Masters
- Pages: 6 (1500 words)
- Downloads: 1
- Author: elehner

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After then, Net Present Value (NPV) for the whole project is computed. Financial and non-financial risks factors are discussed while highlight the issues that may hinder the overall progress and benefits attached with this project. Recommendation is the last part of this report in which the discussion is provided which focuses on the acceptance or rejection of this project. 1. Present Value of Cost of Project The cost of building a new facility in the form of electricity generator is compromised on two years cost. The cost of first year is $25 million whereas the cost for the second year is $28 million. If the time value of money factor is set aside, the total cost of building such generator is $53 million. After discounting this cost with the cost of capital of 8%, the present value is found to be $50.93. The following is the supporting calculations used to compute the present value of building up the generator. Years Cost of Generator Discount Factor (8%) Discounted Value of Cost Present Value of Cost 0 -25 x 1.0000 = -25.00 = -50.93 1 -28 x 0.9259 = -25.93 2. Present Value of After-tax Cash Flows It is expected that after-tax profits earned by selling the electricity would continue over a period of 9 years once the generator facility is built. By leaving out the factor of time value of money, the total profits earned in the form of cash flows from the generator amounts to $75 million. However, if cash flows pertaining to each year are discounted by the cost of capital of 8%, it decreases the value of $75 million a lot such that the present value is summed up to barely $47.16 million. The following is the comprehensive computation, which is used for calculating the present value of sales of electricity. Years After-tax Profits Discount Factor (8%) Discounted Cash Flows Present Value of Cash Flows 2 6 x 0.8573 = 5.14 = 47.16 3 7 x 0.7938 = 5.56 4 8 x 0.7350 = 5.88 5 9 x 0.6806 = 6.13 6 9 x 0.6302 = 5.67 7 9 x 0.5835 = 5.25 8 9 x 0.5403 = 4.86 9 9 x 0.5002 = 4.50 10 9 x 0.4632 = 4.17 3. Net Present Value Net present value computed for the overall project is computed as negative $3.76. Net present value states the amount, which depicts whether the project provides the excess of cash inflows over the cost of building the generator facility after considering the element of time value of money. Following are the detailed computations for calculating the NPV of the project under consideration: Years Cost of Generator After-tax cash flows Discount Factor (8%) Discounted Cash Flows NPV 0 -25 1.0000 -25.00 -3.76 1 -28 0.9259 -25.93 2 6 0.8573 5.14 3 7 0.7938 5.56 4 8 0.7350 5.88 5 9 0.6806 6.13 6 9 0.6302 5.67 7 9 0.5835 5.25 8 9 0.5403 4.86 9 9 0.5002 4.50 10 9 0.4632 4.17 4. Risks The project of building up a new generator facility, which is expected to work for the next ten years bring several risk factors. These factors can be split into two major categories namely as financial and non-financial factors. Financial risk factors are given below followed by the non-financial factors. Financial Factors a) Cost of Capital One of the most important risk factors associated with such financial projections is the estimating the most appropriate cost of capital, which is used as discount factor to discount the cash flows and initial investment in order to compute the present values. It is extremely subjective to estimate the cost of capit
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