ACCA · Question 19 · Investment Appraisal

CASE 4: SOLARIS GRID

Solaris Grid is a public utility company evaluating a new 4-year solar infrastructure project. The project requires an initial investment of $8,000,000 in solar panels and equipment.

The equipment will attract tax-allowable depreciation (capital allowances) at 25% per year on a reducing balance basis. The company expects to sell the equipment at the end of Year 4 for $1,500,000.

The project will generate an additional 10,000 MWh of electricity per year. The current price of electricity is $400 per MWh, but this is expected to inflate by 5% per year.
Operating costs are currently $1,200,000 per year and are expected to inflate by 3% per year.

The project requires an initial working capital investment of $500,000 at Year 0, which will be fully recovered at the end of Year 4.

Solaris Grid pays corporate tax at 20%, payable in the year the profit is generated. The company's nominal after-tax cost of capital is 10%.

Required:
(a) Calculate the Net Present Value (NPV) of the solar infrastructure project and recommend whether it should be accepted. (15 marks)
(b) Discuss the concept of 'Real Options' in investment appraisal and identify two real options that Solaris Grid might possess regarding this project. (5 marks)