Unit 7 Assignment Instructions: Capital Budgeting

Purpose

The goal of this project is to help you develop a fundamental understanding of Discounted Cash Flow (DCF) analysis by building a simple DCF model that calculates Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period. You will analyze their results and write a 35-page paper discussing the models output, implications, and decision-making insights.

Task

Begin by reading the overview of the company in the case study. Afterwards, the financial information for the company will be provided followed by the deliverables. Please read through all the instructions carefully to ensure you dont miss key information or deliverable.

Case Study: RenewCo Discounted Cash Flow Analysis

Begin by reading the overview of the company in the case study. Afterwards, the financial information for the company will be provided followed by the deliverables. Please read through all the instructions carefully to ensure you dont miss key information or deliverable.

Company Name: RenewCo, Inc.

Founded: 2015

Headquarters: Traverse City, MI

Industry: Renewable Energy Products

Number of Employees: 375 (as of 2024)

CEO: Peyton Manning

Company Overview

RenewCo, Inc., founded in 2015, is a leading developer and operator of renewable energy projects, specializing in solar and wind power generation. The company aims to provide clean, affordable, and reliable energy solutions to residential, commercial, and industrial customers across North America. RenewCos mission is to accelerate the global transition to sustainable energy by innovating and investing in cutting-edge renewable technologies.

RenewCo’s core operations include developing utility-scale solar farms, installing wind turbines, and providing consultation services for energy-efficient grid integration. Its diversified portfolio of projects ranges from rooftop solar installations for residential clients to large-scale wind farms supplying power to national grids.

Industry Context

RenewCo operates within the renewable energy industry, which is valued at over $1 trillion globally and projected to grow at a CAGR of 8% through 2030. The industry is driven by increasing government incentives, heightened environmental awareness, and the declining costs of renewable energy technology.

Key trends shaping the industry include:

1. Decarbonization Goals: Government mandates and corporate commitments to reduce carbon emissions.
2. Technological Advancements: Innovations in battery storage, smart grid technologies, and improved efficiency in solar panels and wind turbines.
3. Energy Security: Diversification of energy sources to reduce dependence on fossil fuels and imported energy.
4. Rising Consumer Demand: Individuals and businesses are increasingly seeking to reduce their environmental impact.

Competitors

RenewCo competes with a mix of global energy conglomerates, independent renewable energy developers, and emerging green technology startups:

1. NextEra Energy: A leader in renewable energy with a strong portfolio in wind and solar power.
2. First Solar: Known for its advanced solar panel technology and large-scale solar projects.
3. Brookfield Renewable Partners: A major player in hydroelectric, wind, and solar energy.
4. Tesla Energy: A disruptor in solar and battery storage solutions for residential and commercial applications.
5. Regional Renewable Developers: Smaller companies focusing on niche markets or specific geographic regions.

RenewCo distinguishes itself through its agile project development approach and focus on mid-sized renewable projects, allowing it to adapt quickly to market demands and regulatory changes.

Market Position

RenewCo is a mid-sized company with annual revenues of $320$350 million. It holds a competitive position in the mid-market renewable energy sector, catering to a mix of residential, commercial, and municipal clients. Approximately 60% of its revenue comes from long-term power purchase agreements (PPAs), ensuring steady cash flow and mitigating market volatility.

Financial Overview

Over the last five years, RenewCo has demonstrated steady growth, driven by increasing project completions and strong demand for renewable energy. However, the company faces tight margins due to high initial capital requirements and competitive pricing pressures. RenewCos investment in new technology and expansion into emerging markets reflects its long-term growth strategy.

Challenges and Risks

1. Regulatory Changes: RenewCos operations are heavily influenced by government policies and subsidies, which can vary widely between jurisdictions.
2. Capital-Intensive Projects: Large upfront investments in infrastructure and technology pose financial risks.
3. Resource Dependence: Success in wind and solar energy depends on environmental conditions, requiring careful site selection and risk management.
4. Competitor Advances: Larger players with more significant R&D budgets could outpace RenewCos technological development.

Opportunities for Performance Assessment

RenewCos five years of summarized financial data provide a comprehensive basis for analyzing its financial health and operational success. Students can examine its profitability trends, liquidity, and leverage ratios to assess whether RenewCo is poised to remain competitive in the rapidly evolving renewable energy market. Comparing RenewCos performance against industry benchmarks and competitors will provide additional insights into its strategic positioning and long-term viability.

Scenario

You are a financial analyst for RenewCo, a mid-sized renewable energy company considering a new project: the installation of a solar farm to generate electricity. Management has provided initial investment costs and projected cash flows for the project over five years. Your task is to build a DCF model using the provided data, calculate NPV, IRR, and Payback Period, and provide an analysis of whether the project should be pursued.

Project Financials

Carefully read the following financial information for this assignment.

Capital Expenditures (CapEx)

• Year 0 (Initial Investment): $500,000
• Year 3: $50,000 for system upgrades

Change in Working Capital (WC)

Working capital changes are due to fluctuations in accounts receivable, inventory, and accounts payable. For simplicity, assume:

• Year 1: Increase of $10,000
• Year 2: Increase of $5,000
• Year 3: No change
• Year 4: Decrease of $10,000
• Year 5: Decrease of $5,000

Assumptions for Depreciation Expense

• Initial Investment: $500,000 (Year 0). Depreciated over 10 years using straight-line depreciation.
• Annual Depreciation: $500,000 10 = $50,000.

Project Discount Rate

The Project Discount Rate is 8%

Financial Breakdown by Year (in $)

Year 1Revenue$450,000COGS$150,000SG&A$75,000R&D$20,000Capital Expenditures$0Change in WC-$10,000Depreciation Expense$50,000

Year 2Revenue$545,000COGS$179,850SG&A$87,500R&D$20,000Capital Expenditures$0Change in WC-$5,000Depreciation Expense$50,000

Year 3Revenue$585,000COGS$193,050SG&A$100,000R&D$20,000Capital Expenditures$-50,000Change in WC$0Depreciation Expense$50,000

Year 4Revenue$533,000COGS$175,890SG&A$112,500R&D$20,000Capital Expenditures$0Change in WC$10,000Depreciation Expense$50,000

Year 5Revenue$395,000COGS$130,350SG&A$125,000R&D$20,000Capital Expenditures$0Change in WC$5,000Depreciation Expense$50,000

Project Instructions

Carefully read the following instructions as there are two major steps you will need to complete to finish the assignment

Part 1: Build the DCF Model

1. Open the provided with the project and input the information provided (into the yellow cells):
2. Initial investment in 2025
3. Revenue and expenses for the project for the years 2026-2030
4. Capital expenditures through the life of the project
5. Changes in working capital year-over-year
6. Project discount rate
7. Assess the NPV, IRR and Payback Period calculations generated by the model.
8. Be sure to take the time to understand how these results were calculated.
9. Use the Excel file, after the base case scenario is established (using the provided information) to conduct sensitivity analysis on certain input variables to assess the impact on the results. Examples:
10. Adjust the discount rate
11. Change the revenue in one or more of the periods.
12. Evaluate various initial investment amounts.

Part 2: Analyze the Results

In your 35-page paper, address the following questions:

1. NPV Analysis: What does the NPV tell you about the projects profitability? Is the project financially viable based on this metric?
2. IRR Analysis: How does the IRR compare to the discount rate? What does this suggest about the attractiveness of the project?
3. Payback Period Analysis: How long will it take to recover the initial investment? Is this timeframe acceptable based on industry standards or company goals?
4. Sensitivity Analysis: How might changes in the discount rate or cash flow projections impact the results?
5. Final Recommendation: Based on your analysis, should RenewCo proceed with the solar farm project? Why or why not?

Submission

DCF Model in Excel

• Submit a completed Excel spreadsheet with clearly labeled calculations for NPV, IRR, and Payback Period.

Written Report (35 Pages)

• Provide a detailed discussion of the results, addressing all analysis questions. Ensure the report is well-organized and includes an introduction, analysis, and conclusion.

Criteria for Success

The following rubric has been created to grade your assignment: Capital Budgeting Rubric.

Due Date

Take Action

Due by Tuesday at 11:59 p.m. ET.

This assignment is worth 150 points and will be graded according to the Capital Budgeting Assignment Rubric.