Virginia Natural Gas Company (VNGC) must provide a regulation and metering unit to a new subdivision near Norfolk. They need to determine the revenue requirement so they can determine rates.
They already own right-of-way and must now install the equipment at a cost of $170,000 with operating and maintenance costs of $9,000 per year. The useful life of the equipment is 25 years with no salvage value after that time.
VNGC will borrow the needed capital, and the rate is 11 percent over 25 years with uniform principal payments plus interest on the remaining principal. Depreciation over 20 years follows MACRS-GDS . The effective tax rate is 40 percent.
The attached spreadsheet for the entire life of the project has been constructed for management and they have approved it.
You have been assigned to:
1. Determine the constant (for all years) revenue requirement that will makes the Present worth of the entire project equal to zero.
2. Determine the minimum constant (for all years) revenue requirement that would enable paying shareholders a dividend of 3% of the revenue requirement. This will require adding a line item to the spreadsheet in the cash flow area that deducts this dividend from free cash flow.