Case Study

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ASSIGNMENT 1: Strategic Corporate Finance
Type of Assessment: Case Study: 2500 words (equivalent)
Submission deadline: Upload to Moodle before 14:00 noon Friday 22nd March 2013. Weighting: 50% of module mark
Uploading to Moodle
* Attach the feedback sheet and marking grid to the front of your assignment * Upload your spreadhseet

Learning outcomes
1. Analyse different capital budgeting techniques

2. Evaluate the information derived from different capital budgeting techniques

Introduction
You work at the headquarters of the Yorkshire Wind Farm Company and are responsible for the evaluation of capital projects. The business is currently trying to decide between 2 proposed wind farms. One is onshore, located in the Yorkshire dales and the other is offshore, a few miles from Scarborough. Each project has a capacity of 10MW and a life of 20 years. In general, offshore wind farms costs more to build but there is more wind they will generate more electricity.

Revenue and costs
Revenue will come from selling the electricity to distributors. A tariff of £70/MWh is what is the government is currently guaranteeing.

The amount of electricity generated depends on the strength of the wind and the number of hours of generating that is expected. The wind farms are expected to generate the following amounts of electricity:

| Onshore| Offshore|
Annual output (MWh)| 31,000| 50,000|

It is expected that a full year’s revenue will be available from year 1 onwards.

Summary of costs (and year in which cash flow occurs)| Onshore| Offshore| Investment costs| £’000| £’000|
Preparatory costs (planning, legal etc)| 500| 500|
Windturbines (year 0)| 4,000| 12,000|
Windturbines (year 1)| 6,000| 8,000|
Civil and electrical infrastructure (year 1)| 1,000| 2,000| Grid connection (year 1)| 1,000| 1,500|
Refurbishment (year 5)| 1,500| 3,000|
Decommissioning (year 20)| 2,000| 5,000|
| 16,000| 32,000|
Less government grant| 2,000| 5,000|
Net capital cost| 14,000| 27,000|

The accountant has prepared the following forecast profit and loss accounts for the life of the projects

Onshore wind farm: projected profit and loss accounts (£’000)| Year| 1| 2| 3| 4| 5| 6-19| 20|
Sales| 2,170| 2,170| 2,170| 2,170| 2,170| 2,170| 2,170| Government grant| 100| 100| 100| 100| 100| 100| 100| Total revenue| 2,270| 2,270| 2,270| 2,270| 2,270| 2,270| 2,270| Less expenses| | | | | | | |

Maintenance and insurance| 250| 250| 250| 250| 250| 250| 250| Local taxes| 50| 50| 50| 50| 50| 50| 50|
Land rental| 75| 75| 75| 75| 75| 75| 75|
Daily management| 25| 25| 25| 25| 25| 25| 25|
Own electricity consumption| 25| 25| 25| 25| 25| 25| 25| Depreciation| 800| 800| 800| 800| 800| 800| 800|
| 1,225| 1,225| 1,225| 1,225| 1,225| 1,225| 1,225|
| | | | | | | |
Profit/(loss)| 1,045| 1,045| 1,045| 1,045| 1,045| 1,045| 1,045|

Offshore wind farm: projected profit and loss accounts (£’000)| Year| 1| 2| 3| 4| 5| 6-19| 20|
Sales| 3,500| 3,500| 3,500| 3,500| 3,500| 3,500| 3,500| Government grant| 250| 250| 250| 250| 250| 250| 250| Total revenue| 3,750| 3,750| 3,750| 3,750| 3,750| 3,750| 3,750| Less annual operating costs| | | | | | | |

Maintenance and insurance| 500| 500| 500| 500| 500| 500| 500| Local taxes| 50| 50| 50| 50| 50| 50| 50|
Land rental| 0| 0| 0| 0| 0| 0| 0|
Daily management| 30| 30| 30| 30| 30| 30| 30|
Own electricity consumption| 40| 40| 40| 40| 40| 40| 40| Depreciation| 1,600| 1,600| 1,600| 1,600| 1,600| 1,600| 1,600| | 2,220| 2,220| 2,220| 2,220| 2,220| 2,220| 2,220|

| | | | | | | |
Profit/(loss)| 1,530| 1,530| 1,530| 1,530| 1,530| 1,530| 1,530|

Further information
The following information is also...
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