800 wordscalculation and justification
1 Coursework Briefing 2021/22 (individual, written) Coursework information Course Code MGT1026 Course Title Foundations of Finance Course Coordinator Dr William Finlay Coursework format Written assignment Weighting 25% Word limit 800 (+/- 10%) Action to be taken if word limit is exceeded Will not read or mark beyond the limit Submission date Thursday 24 March 2022 at 12:00noon Introduction This is an individual assignment for Foundations of Finance. You have been presented with a case and are required to write a report to the board of directors for AlbaPower Plc. All core information must be provided in the body of the report with appendices used only for supplementary/supporting information. (Question starts overleaf…) 2 Question You are a project manager working for AlbaPower Plc. AlbaPower is a company based in Glasgow and generates power for use throughout the United Kingdom. Company background: AlbaPower’s main business is in the area of power generation, where it generates electricity via a range of different facilities. The company was established in 1990 when the Scottish electricity market was privatised and has since expanded to generate power in the north of England, as well as Scotland. The company has the following power generation facilities: Station name Power type Generating Capacity (MW*) Clyde Nuclear 1,500 Alva 1 Coal 2,800 Alva 2 Biomass 2,000 Islay Wind (on shore) 150 Western Isles Wind (on shore) 350 Whitehaven Wind (on shore) 400 Torridon Hydro 150 Uig Hydro 100 Lochawe Hydro 25 *megawatt, a unit of power equalling one million watts. The company have performed well due to the high energy prices over the last few years and have £50million available for capital investment purposes. The company are considering a number of potential investment opportunities. Each of the investment opportunities are outlined below: Option 1: Harris offshore Wind farm AlbaPower Plc are proposing to build an offshore windfarm with a capacity of 1,000 MW in the Atlantic Ocean, west of Carloway in the Outer Hebrides. Offshore wind offers a considerable number of advantages relative to onshore windfarms. However, offshore wind has been found to be more expensive to operate, as turbines at sea are more expensive to maintain relative to land-based turbines and the Scottish government requires lease payments to be made for firms wishing to generate energy at sea. It is predicted that the firm will generate the following revenues from option 1: Year 1 2 3 4 5 6 7 8 9 10 Revenue (£million) 10 10 15 15 18 20 20 20 25 20 The costs associated with option 1 are as follows: Cost Amount (£million) Construction cost (year 0) 20 Yearly maintenance costs (years 1 – 5) 3 Yearly maintenance costs (years 6 – 10) 5 Decommissioning cost 10 3 The construction costs above include all elements associated with the construction of the wind farm (manufacture, transportation, installation, electrical cables to land, installation of electrical sub-stations and connection to the power grid). In order to operate the wind farm, users of the seabed require to pay a leasing fee to the Scottish government. It is expected that the lease payment to the Scottish government will be £20million. The terms of the lease require 100% of the lease payment for the project to occur straight away if the project is accepted and goes ahead. The project is expected to have an economic life of ten years. After this, AlbaPower Plc will be required to remove all traces of the offshore windfarm and return the area of the sea to the Scottish government. It is expected that after ten years, the wind turbines will have no economic resale value. Option 2: Isle of Skye Onshore Wind farm AlbaPower Plc are proposing to build an onshore windfarm on the Isle of Skye near Glendale in the northwest part of the island. The wind farm is expected to have a generating capacity of 450 MW. Onshore wind is relatively cheaper to maintain compared to offshore wind farms, but onshore wind capacity is lower than that obtained at sea. It is predicted that the firm will generate the following revenues: Year 1 2 3 4 5 6 7 8 Revenue (£million) 5 5 6 6 6 8 8 8 The costs associated with option 2 are as follows: Cost Amount Purchase cost of the land 4 Construction cost 15 Yearly maintenance costs (years 1 – 8) 3 The firm has already identified suitable land for sale and the cost of the land would be payable immediately. Additionally, AlbaPower Plc would be required to pay for all the construction costs immediately. The project is expected to have an economic life of eight years for AlbaPower Plc. However, after this AlbaPower Plc will seek a buyer of the onshore windfarm and the land. It is expected that the windfarm will be sold for £20million. Option 3: Dunnet Head wave and tidal farm The third option that AlbaPower Plc are evaluating is the build of a new 50 MW wave and tidal farm on the north coast of Scotland near Dunnet Head. Wave and tidal power generation works by converting energy from the movement of the tides and waves into electricity. It is predicted that the firm will generate the following revenues from option 3: Year 1 2 3 4 5 6 7 8 9 10 Revenue (£million) 0.5 0.5 0.5 0.5 1 1 1 1 1 1 4 The costs associated with this option: Since wave and tidal power generation is an immature technology the Scottish government are offering AlbaPower Plc free use of the sea provided the company allows researchers from universities to undertake research on this form of power generation. It is expected that the equipment will cost 15million EUR. The supplier of the wave and tidal equipment are based in Gioia Tauro, Italy and are one of the few places in Europe that build this type of equipment. The company offers the ability for AlbaPower Plc to pay for the equipment before the end of year 1, rather than immediately. It is expected that AlbaPower will take advantage of this offer. Due to the underwater nature of wave and tidal generation, maintenance is expected to be £0.2million year 1 one and this will grow by 10% per year over the lifetime of the project. AlbaPower Plc expects to be able to sell the wave and tidal farm for £5million in year 11. Your financial analyst has provided you with the following foreign exchange data: Mid-market spot rate GBP/USD 1.3560 EUR/GBP 0.8330 ILS/GBP 0.2317 EUR/ITL 1936.27 It is assumed that the construction time in all three options is negligible and that all options will generate electricity (and therefore revenues) in year 1. The company evaluates all projects at the firm’s average cost of capital of 10% 5 As project manager, you have been asked to prepare a report to the board of AlbaPower Plc that covers the following requirements: Q1. Calculate the net present value (NPV) for each of the three options. What option would you recommend at this stage and why? Clearly show your working and clearly state your assumptions (35%) Q2. Further analysis has highlighted that the machinery required for option 3 will not be available for four years due to a fire at the factory in Gioia Tauro, Italy. Therefore, this option has been eliminated from the available investment opportunities. Calculate the internal rate of return (IRR) for each of the remaining two options. Clearly show your working. (20%) Q3. Should AlbaPower Plc go ahead with either of the remaining investment two projects? In your recommendations to the board you should refer to previous sections and any other supporting information/calculations. Consider any limitations of your analysis that you might want to highlight to the board. (45%) (TOTAL 100%) 6 Assessment criteria Assessment criteria Structure 1 Clear executive summary that sets out the main issues 2 Development of sections – quality/coherence of sections and logical progression through material 3 Logical conclusions that relate to, and stem from, previous discussion Content 4 Identification of relevant investment appraisal techniques and relevant finance concepts 5 Location and use of relevant information from the case 6 Application of appraisal techniques and foreign exchange conversion 7 Clear reference to assumptions of analysis 8 Critical evaluation of approaches/assumptions/findings Presentation 9 Style and quality of written communication 10 Good report structure including clarity and conciseness 11 Appropriate presentation of equations/calculations and charts/graphs, where appropriate Word count 12 Is the work within 800 words +/- 10%? 7 Feedback method Individual feedback will normally be provided via Moodle. Generic (class-level) feedback and grade profiles will normally be posted on Moodle. Students can use academic staff office hours for additional feedback on your work. Preparing your coursework Document creation 1. Please use this file naming convention: