Birdsville Geothermal Project Case Study - Investment and Financing - Finance Assignment Help

Assignment Task:

Birdsville Geothermal Project Case Study 

Case Study Assignment:
“Birdsville Geothermal Project”
Case Study description1
The small town of Birdsville in Western Queensland, Australia, is currently supplied with electricity by an isolated grid consisting of diesel generators and an existing geothermal power plant. The electricity is generated, distributed and supplied by a state government-owned corporation. The current geothermal power plant has come to the end of its life. A new geothermal power plant is proposed. This power plant has a capital cost of $AU 13 million, however the company expects to receive a government grant of $AU 4.3 million. The power plant has a capacity of 340 kWe and is expected to generate 25,275,446 kWh over a lifetime of 12 years. The electricity generated will not be purchased by another entity as the state government company is both the generator and distributor in this case. It is to be analyzed whether replacing the current geothermal plant with a new one is more favorable than switching to a conventional energy source and using diesel generators as the sole means of generating electricity. Further key parameters of the project are as follows:

The project team has already started some technical and financial analyses which can be used to prepare a more detailed business case for the project (see Excel file).

Task 1:
You are asked to evaluate the financial attractiveness of the proposed geothermal plant. Is the geothermal plant attractive in absolute terms and in relative terms? Choose appropriate indicators for your assessment, such as:

• Net Present Value (NPV)
• Discounted Payback Period (DPB)
• Levelized Cost of Energy (LCOE)

Task 2:
You miss a detailed analysis of risks associated with the project. You therefore decide to perform a short sensitivity analysis:

• Identify the main risks associated with the project: what might affect project attractiveness and why?

• Set up a small sensitivity analysis (Excel file) and show the financial impact of the identified risks. Which risks are “critical” and which ones seem to be manageable?

• Which risk management actions would you proposed to the project owner?

• How does risk affect your assessment of absolute and relative attractiveness of the geothermal plant?

Task 3:
The financial analysis provided assumes 100% equity financing. You wonder whether the project would be considered attractive enough by potential project sponsors to provide the necessary capital. You therefore complement the analysis with a small financing analysis that is based on the following scenario:

30% of investment cost will be provided by the project owner as equity capital, the remaining 70% are financed through debt with 1+9 years maturity at an interest rate of 7%, meaning that in the first year only interest has to be paid and in years 2 to 10 principal has to be repaid in 9 equal installments at the end of each period (i.e. first installment due at the end of period 1), interest payments are due at the end of each period together with debt installments. Compute the:

• Average Debt Service Cover Ratio (AVDSCR)

• Loan Life Cover Ratio (LLCR) for this financing structure. Would you recommend financing the project? You should cover this task on approximately 1 page (plus calculations in Excel). You can earn 20% of the total score on this task.

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