The financial statement of X, a company that focuses on renewable energy investment, indicates that the company has $5 million of debt (with average interest rate of 3.8%) and $8 million of asset. The company has 1 million shares of stock traded in the market at the price of $4 per share. An analyst reports that the prevailing risk-free rate in the market is 2.8%, the expected market risk premium is 4.8%, and the “beta” (which reflects the volatility of Company X’s stock price) is 1.4.
Company X is considering investing in 3 energy projects: Project “A” costs $ 1.3 million to invest now and generates cash flow of $312,000 at the end of each of the first 5 years, $290,000 at the end of year 6, $300,000 at the end of year 7, and nothing after that. Project “B” costs $2.5 million to invest 1 year from now and generates cash flows of $600,000 at the end of the first 5 years after investment and nothing after that. Project “C” costs $2.2 million to invest three years from now and generates cash flows of $480,000 at the end of the first 9 years after investment and nothing after that.
Company X is considering investing in a 0.6 GWe power plant with the following features: construction cost = $1.25 billion (full amount paid at the beginning of the 2 years of construction time); operation lifetime (after construction is completed) = 25 years; capacity factor= 0.72; operation and maintenance cost = $ 33 million per year, fuel cost: $ 56 million per year; decommission cost: $0.4 billion.
1. Calculate the levelized cost of energy (LCOE) of the power plant
2. Suppose fuel cost is uncertain. More specifically, the annual fuel cost is normally distributed with mean of $ 56 million and $ 2.4 million of standard deviation, what is the LCOE at 0.05 significance level.