Internal Code: 1HJIF
This assignment is an opportunity for you to reflect on and integrate the materials covered through a simplified case. The materials covered include the characteristics of project finance and how a typical project finance proposal can be evaluated.
Upon successful completion of this assessment you will be able to:
1. Understand the characteristics and structure of project finance
2. Determine the key components to be included in the cash flows for the evaluation of project finance
3. Develop a project cash flows using spreadsheet to determine the financial feasibility of project
4. Evaluate project feasibility and provide justifications
ABC Pty Ltd intends to form a special purpose vehicle (SPV) to be incorporated 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 solutions to the local community. The following are some of the in-principle agreements with the various parties after much negotiation:
1. The project is to be developed using a BOT arrangement where Water Solution will finance and build, operate and transfer the facilities back to the state government at the end of 20 years.
2. There are three off-take agreements:
a. 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.
b. 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.
c. 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.
3. The capital expenditure (include construction cost plus all relevant professional fees, insurance) is estimated at $85,000,000 incurred at year 0
4. Water Solution has an agreement to buy untreated water from DirtyWater Ltd at the price of $0.012 per cubic litre. The price of untreated water will increase by 3% per annum.
5. The annual operation cost (starting from year 1) is estimated to be as follows:
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