Question

The developer and owner of a shopping mall is planning to install solar PV panels on the roof top. Project Costs: The 100-kw system will cost $225,000 to install on 600 m2 of space available on the roof top. It will have a useful life 20 years and a salvage value of $2,000. Annual operations and maintenance cost will be $1,500. Energy output: Based on Singapore weather conditions, the system is capable of producing 170,000 kwh of electricity in the first year of operation. However, this output will degrade at a rate of 2% per year through its useful life. The electricity produced will be sold to either the shopping mall’s tenants or to the power grid at 18 cents per kwh. Project Financing: 60% of the initial system cost will be financed via a 5-year bank loan at an interest rate of 5% per year. The loan will be repaid with 5 equal end-of-year payments starting at the end of the first year. The other 40% of the initial project cost will be financed with company’s equity capital. The company computes the WACC and determines that MARR should be10% for the purpose of evaluating the feasibility of this project

(a) What is the annual repayment amount for the bank loan?

(b) What is the Present Worth of the project? Is the project financially feasible?

(c) What is the IRR of the project?

(d) The Levelized Cost of Energy (LCOE) is the “average” equivalent cost of installing and operating an energy generation asset, per unit of total energy generated over the useful life. Equivalently, LCOE is the constant sale price of electricity generated that makes PW = 0. Determine the LCOE of the proposed solar PV project in cents/kwh.

Answer 1

a)		Working
Financed by Bank Loan=	$             1,35,000	225,000*60%
PVAF=	4.33	PV(5%,5,-1,,0)
EMI=	$          31,181.60
Annual repayment amount for the bank loan	$          31,181.60
b)
EMI	$                31,182
PVAF @10%	3.79
PV of Bank Loan repaid	$             1,18,203
Add: Balance 40% cost	$                90,000	225000*40%
PV of outflows	$             2,08,203
Year	Output	Rate ($)	Inflows	Maintence cost	PV @10%
1	1,70,000	$              0.18	$          30,600	$                        1,500	$            26,455
2	1,66,600	$              0.18	$          29,988	$                        1,500	$            23,544
3	1,63,268	$              0.18	$          29,388	$                        1,500	$            20,953
4	1,60,003	$              0.18	$          28,800	$                        1,500	$            18,647
5	1,56,803	$              0.18	$          28,224	$                        1,500	$            16,594
6	1,53,667	$              0.18	$          27,660	$                        1,500	$            14,767
7	1,50,593	$              0.18	$          27,107	$                        1,500	$            13,140
8	1,47,581	$              0.18	$          26,565	$                        1,500	$            11,693
9	1,44,630	$              0.18	$          26,033	$                        1,500	$            10,405
10	1,41,737	$              0.18	$          25,513	$                        1,500	$              9,258
11	1,38,902	$              0.18	$          25,002	$                        1,500	$              8,237
12	1,36,124	$              0.18	$          24,502	$                        1,500	$              7,329
13	1,33,402	$              0.18	$          24,012	$                        1,500	$              6,521
14	1,30,734	$              0.18	$          23,532	$                        1,500	$              5,802
15	1,28,119	$              0.18	$          23,061	$                        1,500	$              5,162
16	1,25,557	$              0.18	$          22,600	$                        1,500	$              4,592
17	1,23,046	$              0.18	$          22,148	$                        1,500	$              4,085
18	1,20,585	$              0.18	$          21,705	$                        1,500	$              3,634
19	1,18,173	$              0.18	$          21,271	$                        1,500	$              3,233
20	1,15,810	$              0.18	$          20,846	$                        1,500	$              2,876
					$         2,16,925
		Add: Salvage value at PV			$                  297
		PV of Inflows			$         2,17,222
		PV of Outflows			$         2,08,203
		Present worth of Project			$              9,019
Yes, Project is financially feasible
c)
		At 11% discounting above figures
		PV of Inflows			$         2,04,196
		PV of Outflows			$         2,08,203
		Present worth of Project		$                       -4,006
PV at 10%=	$                  9,019
PV at 10.50%=	$                 -4,006
IRR=	R1+	(NPV1*(R2-R1))/(NPV1-NPV2)
IRR=	10+	(9019*(11-10))/(9019+4006)
IRR=	10+	0.69
IRR=	10.69%
d)
LCOE=	Sum of costs over Lifetime/sum of electrical energy produced over lifetime
LCOE=	(225000+1500*20-2000)/(2825332)
LCOE=	$                    0.09

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