Fingask Estates Ltd. is a medium sized agricultural company based in Scotland. Its principal activities are the production and sale of a range of agricultural crops and the rental of rivers and moorland for sport fishing and shooting. In the latest financial year the company made a pre-tax profit of approximately 2 million.
The management team are considering some diversification of activity by moving into electricity generation through an investment in wind turbines. The team have been attracted to this investment for a number of reasons; the potential reduction in the company’s electricity cost, the scope to sell ‘additional’ generation to a national electricity company and the availability of investment grants from the EC.
Preliminary research conducted by external consultants at a cost of 90,000 has identified a suitable site on the estate and recommended the turbine as economically viable.
The directors of the company are however hesitant to make a firm commitment at this stage and have requested a more detailed analysis of the proposed investment.
The following financial data is available:
The company intend to purchase and install a 1 megawatt (1 MW) wind turbine. The cost is estimated at 1,800,000, but this will be offset by an anticipated capital grant from the EC of 40%.
The turbine has maximum theoretical capacity of 8,760,000 kilowatt hours (Kwhr). However the consultants report suggests that current wind patterns and speeds will mean that the turbine will generate some 30% of this maximum capacity. The report indicates a useful commercial life for the turbine of approximately 15 years.
Grants and Cost Savings
The company is confident that the investment, it will through qualify for an annual green energy grant from the EC. This annual grant is currently 30,000. There is however a growing lobby in the European Parliament to restrict both the award and value of this grant for agricultural enterprises.
By generating its own electricity the company expects to reduce its annual costs (based on a usage of 200,000 Kwhr) by 40,000
Revenues and Costs
After meeting its own needs the company has the option of selling its ‘surplus’ generation to a national utility company. The utility company will provide the required connections and infrastructure and pay for the feed in electricity at a price of 0.10 per Kwhr.
Variable generation costs for the turbine are forecast at 0.04 per Kwhr; additional fixed costs are estimated to be 10,000 per annum.
The company depreciates capital equipment on a straight line basis over its estimated useful life.
To date a discount rate of 10% has been used to evaluate capital projects.
Element 1 (weighting 25%)
As a group:
Prepare a set of first level financial analyses and interpretation for the proposed investment as follows:
Annual profit before taxation
Annual cash flows and overall net annual cash inflow
A breakeven analysis including break-even point (BEP) and margin of safety
Simple Payback Period
You are required to present your analyses as a formal, 15 minute presentation in your workshop in week commencing 5th December. Guidance on the presentation is included in the assessment criteria and will be further clarified in preceding workshop activity.
A detailed assessment grid is included as part of the assignment materials. You should take due account of this and in particular the weightings for each element, in structuring your presentation
Element 2 (75% weighting)
As an individual:
Prepare a report, in a format suitable for the directors of the company which recommends whether or not to go ahead with the proposed investment in the wind turbine. Your report should include:
1. An executive summary identifying the key issues arising from all of your analyses (including those in element 1) and your overall recommendation.
2. Financial analysis and interpretation in addition to those in element 1:
Appropriate net present value (NPV) calculations
Appropriate sensitivity calculations
3. An evaluation of the potential impact of wider, business context factors on the investment decision.
4. An appendix (maximum 500 words) which critically evaluates strengths and weaknesses of the financial techniques you have employed in both elements 1 and 2.
Your report including the appendix at part 4, should not exceed 2,000 words (+ or – 10%). You may use additional appendices which will not form part of the word count. These must not exceed FOUR A4 sides. It is envisaged that most of the additional appendices will be used to present detailed calculations rather than have these in the main body of the report. The report and appendices should be clearly legible and presented in a minimum 10 point font.
A detailed assessment grid is included as part of the assignment materials. You should take due account of this and in particular the weightings for each element, in structuring and presenting your report.
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