Essay about Literature and Language
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Literature and Language
To adequately finance the Nick- Power wind turbines project with 28 turbines projected to provide for sustainable annual generation of wind power of 1 5,708,892 Kw/hr for each turbine translating to 43,984,976 Kw/hr annually at a total initial cost of purchasing the turbines for $ 42,000,000 over a long term period of 10 years as a viable project. A number of financial instruments will be employed to optimize the return on this investment. Net profit after adjustments on operating costs and tax are also projected to be promising increasing proportionally with the increase in power prices which is also projected to increase with higher demand as compared to supply. Operating costs are projected to increase marginally inline with perceived increases in tax rates and inflation.
Net working capital is projected to be strongly on the positive territory over the ten year projected term.
Initial working capital of $ 100,000,000, is proposed to be adequate for financing this project through the construction stage, through to reporting of the projects initial profits.
This financing will be sourced mainly from the parent company, a publicly listed company in a major stock exchange. Trade in the stock market has improved with news of the Nick windmill project gaining good rating in the stock market, consumer confidence especially from expanding industries to meet their energy demands and residential consumers calling for cheaper energy provision with the increase in crude oil prices, and entry into the green energy initiative currently being advocated for by the government as clean and independent from global price change as is the case with crude oil.
This has translated to good credit ratings with major financial institutions showing a lot of interest in the project. A new rights issue or call option issue will be available to existing and new share holders for sale of new common stock for the project. This option being American will offer the shareholder the right to sell of the shares before expiration date. Issuance of a warrant as a long term option will contribute toward capitalization as the will target investment firm who are willing to take up Nick Windmill stocks as an alternative investment. This will greatly reduce agency costs and acceptance of low interest rates on the debt issue due to the potentially good profits. Convertible securities in convertible bond and convertible preferred stock will be snatched up by hedge funds who will in turn indirectly gain from corporate 70% dividends-received deduction.
The parent company of Nick- windmill turbines has proposed to offer interest rate swaps to the firm providing and setting up the turbines, This contract will ensure financing is available for the acquisition and subsequent construction of the turbines so as to restructure the existing debt. This will aid in keeping transactions between the Turbine provider and Nick-windmill to cushion against market imperfections.
Long term debt as a method of financing will also play a major role in the construction period. The construction company has agreed to offer a long-term debt inclusive of service to turbines and periodic upgrading of the entire turbine project. This will mainly be in as equipment trust certificates coupled with conditional sale contracts in line with the swap contracts. Traditional portfolio financing is favored by the parent company due to its view of the improved credit rating in their quest to diversify in non traditional power generation methods. Nick-windmill project and the parent company are of the opinion that leasing will not be employed. This is due to the parent firms confidence in the long term position of the entire firm is bound to grow and leases will be expensive to manage. This is seen as adequate in the foreseeable future in which more turbines will be commissioned. Renewals of lease extension periods, accounting complications, valuation, and taxation policies as regarding leases have been cited as being cumbersome by the parent company. Areas where wind is strong to provide wind power generation have been identified and will be acquired by the parent company in the short term given the strong performance projected. Leases are
The parent company treasurer, has advised that as a project Nick-windmills consists of a discrete set of assets, projected positive NPV and large enough to increase the parent companies risk and therefore will be ran as per the above guidelines which fit into the parent company’s financial structure and risk reduction techniques. The project mainly sponsored by the parent company will share risk. This is in spite of the viability of the project. This will enable contractual arrangements to be facilitated by the parent company with insurance firms wit whom they have had good working relations, suppliers, and the distribution partners.
The tax treatment of financial leases will present two main disadvantages, the parent company will forfeit all tax deductions related to asset ownership and that Nick-windmills being the lessee will have to give up the residual value of the lease. In any case, the present value of leasing will in the short term surpass the present benefit associated with the lease.
Hedging will aid Nick-windmill in providing a way to reduce the changes in the sensitivity of the price essentials, exchange rates, or interest rates. Hedging allows Nick-windmill to be in a position to offset its position by buying or selling financial instruments in its possession whose value changes contrary to the value of the asset being hedged. Derivatives such as options as financial instruments can be hedged against negative outcomes maintaining the opportunity to gain the advantage of a good outcome.
For the swaps with the turbines supplier, hedging will be advantageous to Nick-windmill as a project since as a floating rate borrower, to hedge against a change in interest rates will adequately cushion Nick-windmill against such by engaging in a swap to agree for payment of a fixed and floating rate.
Upon a successful survey of windpower generation project tabulated in the week four report, projects a profitable venture. A present-value based measure used for determining the compounded annual rate of return on investments held for a time period of one year or more. An investment with a higher IRR is typically favored, over an alternative investment.
The future stream of benefits and costs converted into equivalent values at present. This done by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits.
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