ABC Pty Ltd intends to form a special purpose vehicle (SPV) in Australia. This will involve building new water treatment facilities. ABC Pty Ltd intends to undertake the development of the proposed water treatment facilities through a project financing approach. The constructed facilities will be used as the business solution in providing clean water to the local community. The following are some of the in-principle agreements with the various parties after much negotiation:
- The project is to be developed using a BOT arrangement where WaterSolution will finance and build, operate and transfer the facilities back to the state government at the end of 20 years.
- There are three off-take agreements:
- to sell CallWater Pty Ltd 450,000 cubic litre of treated water per day at a price of $0.025 per cubic litre. This agreement will expire at the end of 20 years. The contract allows for the price to increase by 7% per annum.
- to sell APWater Limited 550,000 cubic litre of treated water per day at a fixed price of $0.020 per cubic litre. This agreement will expire at the end of 20 years. The contract allows for the price to increase by 10% per annum.
- to sell Nuwater Pty Ltd 600,000 cubic litre of treated water per day at a fixed price of $0.030 per cubic litre. This agreement will expire at end of 20 years. The contract allows for the price to increase by 5% per annum.
- The capital expenditure (include construction cost plus all relevant professional fees, insurance) is estimated at $85,000,000 incurred at year 0
- WaterSolution has an agreement to buy untreated water from DirtyWater Ltd at a price of $0.012 per cubic litre. The price of untreated water will increase by 3% per annum.
- The annual operation cost (starting from year 1) is estimated to be as follows:
- a. Management fees $350,000 per annum with an increase of 10% per annum
- b. Maintenance works $600,000 per annum with an increase of 10% per annum
- c. Insurance cost $150,000 per annum with an increase of 5% per annum
- d. Miscellaneous cost is fixed at $100,000 per annum
Also assume the following:
- Current interest-free rate (based on Government bond) is 3.5%
- ABC Pty Ltd’s beta is estimated to be 0.9 (based on the ratio of the standard deviation of the firm’s return to the standard deviation of the stock market return)
- Expected market return of the water industry where ABC Pty Ltd’s main business lies, is 15%
- WaterSolution will borrow 75% of the capital expenditure from a consortium of banks at a cost of 12%. The repayment will start immediately in Year 1 and should be repaid fully in year 20. The remaining 25% is raised through equity.
- Assume construction completed in year 0 and operation begin immediately in year 1
- Assume there is no tax involved
Prepare a report to the Board of ABC Pty Ltd. In your report, you should include (but not limited to):
- Calculation of the Project IRR
- Calculation of the Equity IRR
- Calculation of the DSCR
- Calculation of Expected Return on Equity using CAPM
- Calculation of the WACC
- Recommendation to the Board on whether the project go ahead using project finance scheme? Give your reasons and justifications.
Support the report with reference to relevant formulae, charts and tables. Ensure that the report looks professional and is in line with the RMIT Report writing format (see below). Word length excluding references should be around 2,000 words
Title pageTitle – states the purpose of the report
Details of the person(s) for whom the report was prepared
Details of the person(s) for who prepared the report (student name and ID) Due dateTable of contentsShows the sections of the report
Created automatically if headings are formatted in the correct heading stylesExecutive summary/abstractGives a summary of the whole report
Outlines the purpose, the approach adopted, findings, main conclusions and recommendations (the reader/audience can easily identify what, how, why) Written last, on it’s own pageIntroductionOutlines purpose, context, background rationale Identifies the existing situation
Provide an outline structure of the reportApproachExplains how the economic parameters was calculated, and outlines how the parameters were analysed Results/Findings
(maybe combined with discussion)Presents findings of the research in paragraphs
Facts only – no interpretation
Can use graphic forms (e.g tables and graphs) with labels/captions Contains headings and sub-headingsDiscussionPresents an interpretation, analyses and evaluation of the results Analyses results – draws together different aspects of the findings, and relates them to other studies by referring to the literature Conclusion
(may be combined with recommendations)A brief statement of what was found and its significance (no new information)RecommendationsSuggests suitable changes/solutionsAppendixAttachments of additional supporting information (e.g. raw data, surveys, questionnaires, detailed statistics, a glossary, etc.)