Tom Jones, the CFO for the firm PSUWC Energy, LLC, woke up with a start at 4:00 am on 4/21/20, due to his phone ringing.



Final Excel project


Tom Jones, the CFO for the firm PSUWC Energy, LLC, woke up with a start at 4:00 am on 4/21/20, due to his phone ringing. It was his senior financial analyst, vacationing in Europe, calling with bad news. Tom was supposed to present his project evaluation, at the end of the week, for the Board's proposal that they invest in new equipment that generates electricity, using a new nuclear technology. His staff of financial analysts had been working hard over the last few weeks collecting data and had prepared a model creating a financial forecast about the proposed project's viability.

Disaster had struck on the night of 4/20/20 wherein malware all but wiped out the work of the analysts. Tom needed to prepare a financial analysis of the project to present the Board with his recommendations. All the staff had already left for their annual vacation and Tom was on his own. Tom quickly reached his office and managed to salvage what was left of the excel spreadsheet prepared for the presentation. What follows is some basic information that Tom knew and was able to retrieve about the project.

PSUWC's existing plant has excess capacity, in a fully depreciated building, to install and run the new equipment.  Due to relatively rapid advances in the technology, the project was expected to be discontinued in six years. The proposed project was capable of providing 34000 kW [1] per hour power. Typically, PSUWC ran its plants 24 hours a day, 7 days a week at an average of 65 % Capacity factor [2] , which is what the project would start with. However, his engineers had assured him that the implementation of the new technology would enable them to increase their capacity factor by 18 % a year till they reached a 100% capacity factor. (This meant that the capacity factor for year 2, CF2, would be = CF1*(1+growth_rate), till 100% was reached and then would stay at 100%). A total investment of $32,000,000.00 USD for new equipment was required. The equipment had fixed maintenance contracts of $3,800,000.00 per year with a salvage value of $9,000,000.00 and variable costs were 53% of revenues.


The new equipment would be depreciated to zero using straight line depreciation. The new project required an increase in working capital of $6,000,000.00 and $1,000,000.00 of this increase would be offset with accounts payable. PSUWC would be able to sell all the electricity it generated at the rate of $0.138 per kilo-watt hour in the market they served.


The corporate tax rate was 39% and PSUWC currently has 1,000,000 shares of stock outstanding at a current price of $16.00. The company also has 30,000 bonds outstanding, with a current price of $943.00. The bonds pay interest semi-annually at a coupon rate of 4.60%.  The bonds have a par value of $1,000 and will mature in 21 years.


Even though the company has stock outstanding it is not publicly traded.  Therefore, there is no publicly available financial information.  However, management believes that given the industry they are in the most reasonable comparable publicly traded company is Companhia Paranaense de Energia - COPEL (NYSE Ticker Symbol ELP) [3] . In addition, management believes the S&P 500 is a reasonable proxy for the market portfolio. Therefore, the cost of equity is calculated using the beta from ELP and the market risk premium based on the S&P 500 annual expected rate of return [4].

Tom knew that because of the size of the proposed project, he had to take into account the change in capital structure the new project would cause his firm. To this end, he had a choice between raising the new capital needed either using 30% /70% split between issuing bonds/equity or a 70 % /30 % split between issuing bonds/equity . The bonds would have to be retired at the end of the project's life [6]. Tom knew that the cost of debt would depend on the new D/E ratio that the firm would have based on his decision to raise capital. Tom looked at the worksheet titled Rd with DtoE, realizing that the cost of debt increased with an increasing D/E ratio [7] . Additionally, the state government had promised to raise the debt for PSUWC via the issuance of bonds, with the caveat that upon termination of the project PSUWC would have to pay a Nuclear Waste Disposal Fee, equivalent to the amount of money raised via the issuance of debt.


Tom needed to calculate the rate at which he would have to discount the project to calculate the Net present Value of the proposed project based on his decision of raising capital and the current capital market environment. This discount rate, the WACC, would obviously influence the NPV and could affect the decision of whether or not to accept the project. Thankfully, he had all the information needed to calculate this and hence the NPV. Tom needed to clearly show all his calculations and sources for all parameter estimates used in the calculation of the WACC.

Gathering all the available information, Tom got a large cup of extra strong coffee and sat down to work on the development of his Capital Budgeting project model. His correct recommendation to the board was critical to the future growth of the firm!


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