Posted: September 16th, 2017

Strategic Financial Management

Strategic Financial Management

The Scott Nuclear Power Company (SNPC) has received initial planning consent for an Advanced Boiling Water Reactor.

This project is one of a number that has been commissioned by the Government of Redland to help solve the energy needs of its expanding population of 60 million and meet its treaty obligations by cutting CO2 emissions to 50% of their 2010 levels by 2030.

The project proposal is now moving to the detailed planning stage which will include a full investment appraisal within the financial plan.

The financial plan so far developed has been based upon experience of this reactor design in Japan, the US and South Korea.

The core macro economic assumptions are that Redland GDP will grow at an annual rate of 5% (nominal) and inflation will be maintained at the 2% p.a. target set by the Government.

The construction programme is expected to cost $2 billion over three years, with construction commencing in January 2013. These capital expenditures have been projected, including expected future cost increases, as follows:
Year end 2013 2014 2015
Construction costs ($ million) 600 1,200 200

Generation of electricity will commence in 2016 and the annual operating surplus in cash terms is expected to be $195 million per annum (at 1 January 2016 price and cost levels). This value has been well validated by preliminary studies and includes the cost of fuel reprocessing, ongoing maintenance and systems replacement as well as the continuing operating costs of running the plant. The operating surplus is expected to rise in line with nominal GDP growth. The plant is expected to have an operating life of 30 years.

Decommissioning costs at the end of the project have been estimated at $600 million at current (2013) costs. Decommissioning costs are expected to rise in line with nominal GDP growth.

The company?s nominal cost of capital is 12% per annum. All estimates, unless otherwise stated, are at 1 January 2013 price and cost levels.

Required:
Produce a preliminary briefing note (approx. 2,000 words or equivalent excluding appendices) which, on the basis of the above information, includes:
An estimate of the net present value for this project as at the commencement of construction in 2013; (25%)
A discussion of the principal uncertainties associated with this project; (25%)
A sensitivity of the project?s net present value (in percentage and in $), to changes in the construction cost, the annual operating surplus and the decommissioning cost. (Assume that the increase in construction costs would be proportional to the initial investment for each year); (20%)
A critique of the main issues of SNPC using 100% debt funding to finance the project and the effect this would have on the appraisal in i) above. (30%)

Note: the formula for an annuity discounted at an annual rate (i) and where cash flows are growing at an annual rate (g) is as follows:
An =