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.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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
If the loan interest rate will be increased by 2% at the start of year 11. The NPV will be changed to $
%. By using the IRR rule, the investor should
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)
million and
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.
Transcribed Image Text: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 If the loan interest rate will be increased by 2% at the start of year 11. The NPV will be changed to $ %. By using the IRR rule, the investor should 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) million and 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.
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