THE TENNESSEE VALLEY AUTHORITY: THE COST OF POWER

  

THE TENNESSEE VALLEY AUTHORITY: THE COST OF POWERRead over the case. You may want to research the Tennessee Valley Authority (TVA) atwww.tva.gov.**Please be specific and detailed with answers and show all work. Thank you.Evaluate the five alternative production projects using traditional discounted cash flow analysis:a) What is the appropriate cost of capital for this case? Support your reasoning.Note that the marginal cost of capital is the appropriate input for capital budgetingdecisions. This rate should best estimate of the current cost of raising additional debt ofsimilar risk. (The historical average of 5.5% is not correct.)b) Fill in the following operating characteristics of each of the production alternatives?I have completed the first one for you Natural Gas.Plant TypeNatural GasNuclearWindSolarCoalUseful Life(Years)20Cost (In Millions $)650Expected Annual Cash Flows(In Millions $)85c) Calculate the net present value (NPV) and internal rate of return (IRR) for each of thealternatives: natural gas plant, nuclear plant, wind plant, solar plant and coal plant.Use the excel template to complete this.The first one is completed for you Natural Gas. Be sure, however, to enter the cost ofcapital you determined in part a as the WACC (weighted average cost of capital). This willchange the NPV for Natural Gas.b) Other:?Address the important question of what mix of projects should be pursued? Explain why.Keep in mind that the total long-term debt funding available to TVA is $30 billion and thecurrent level is almost $9 billion. Also note that the needed additional power generationfrom new construction is 2,835 MW.?Might there be additional factors other than cost and return that ought to be considered?Well identify two and speak to them briefly.Some Helpful pointers:?This case is rich with information. To assist you get started on the right foot please notethat the information you need to complete the discounted cash flow analysis comeslargely from page 7. You need to provide for an estimate for appropriate cost of capital,however, in order to complete the analysis. The discussion on funding considerationswhich starts on page 5 into page 6 should go a long way to assist you with the info.?Keeping apples with apples, so to speak, the estimation of useful/expected lives in thiscase study are provided in terms of “from the day construction is started” as constructiontimes vary across the five alternatives.?Keep in mind that TVA is seeking to provide for additional power generation of 2,835MWand looking to the feasibility of 5 production alternatives to meet this need.?Note that a capital budgeting decision never includes sunk costs in theiranalysis, meaning that the “values” of TVA’s existing facilities are not relevant! It’s in thepast and should not affect TVA’s decision regarding the production alternative to nowpursue. That said, one should approach capital budgeting decisions in terms ofincremental cash flows. So in other words, if TVA elects to pursue any one of these newconstruction projects (ie. a natural gas plant), what changes? Answering this question isthe upfront cost to take it on as well as the incremental stream of annual cash inflowsfrom the business generated.