IBF 5070 Module 8 Final Project: A Complete Model and Recommendation for the Solar Project Example

The Cumberland Solar Project: Model, Risks and a Conditional Recommendation to the Board

Student Name

MBA in Finance, Thomas Edison State University

IBF-5070: Financial Modeling

Mentor Name

Month Day, Year

The Cumberland Solar Project: Model, Risks and a Conditional Recommendation to the Board

Executive Summary

Bayshore Renewables proposes to build a 60 MW solar farm in Cumberland County, New Jersey, at a cost of $93.6 million, selling its output for 20 years under a contract starting at $70 per MWh. The base-case model gives an after-tax NPV of about $3.1 million at 7 percent and an IRR of 7.5 percent, and the project can support about $40 million of debt. Risk analysis shows little room for error: the PPA price at which NPV hits zero is $66.72 and has a 42 percent simulated probability of losing value. My advice is to go ahead only with a PPA of $72 per MWh or more and a fixed construction price no higher than $1.20 per watt.

Model Design

The model follows the structure set out in Module 1. One input sheet holds every assumption with its source. A timeline runs monthly through 18 months of construction and annually through 35 years of operation, with flags for commercial operation, the end of the contract and the end of depreciation. Calculation sheets build generation, revenue, operating costs, taxes, depreciation, the investment tax credit, debt and the cash waterfall. An output sheet reports value, returns, coverage and the risk results, and a check sheet confirms that debt repays, cash never goes negative unnoticed and annual totals match monthly ones. Bodmer (2015) recommends this separation so that a reviewer can trace any output to its inputs; a colleague reviewed the model and found two errors, both corrected, in the tax depreciation rows.

Key Assumptions

Base-Case Results

The year 1 cash flow includes the $28.1 million investment tax credit; years 1 to 6 include tax savings from five-year MACRS depreciation on a basis reduced by half the credit. The model assumes Bayshore can use these tax benefits, either against its own income or through a credit sale. Revenue falls in year 21, when the contract price gives way to the lower market price. On a $93.6 million investment, the after-tax NPV at 7 percent is about $3.1 million and the IRR 7.5 percent.

Debt Capacity

Lenders set the loan from contracted-year cash available for debt service, with coverage of 1.35 times or better. Contracted EBITDA starts at about $5.2 million, so annual debt service can be about $3.9 million. At a 6.5 percent interest rate over 18 years, that supports about $40 million of debt, roughly 43 percent of the construction cost. Gatti (2018) notes that lenders size solar debt on P90 or a similar conservative case; at P90 generation the supportable debt would fall to about $36 million. Esty (2004) emphasizes that non-recourse lenders rely only on the project's cash flow, which is why coverage, not Bayshore's corporate balance sheet, sets the debt.

Break-Even and Scenarios

The downside combines P90 generation, a 10 percent construction overrun and market prices 30 percent below base; the upside combines generation 5 percent above P50, costs 5 percent under budget and prices 20 percent above base. More value can be lost in the bad case than gained in the good one.

Simulation

A 5,000-trial Monte Carlo simulation drew generation from a normal distribution, construction cost from a triangular distribution skewed toward overruns and post-contract prices from a lognormal distribution. The mean NPV was $2.1 million, below the base case because of the skewed cost distribution, and the probability of a negative NPV was 42 percent. Hertz (1964) introduced this approach to show managers the range of outcomes a single estimate hides; here the range runs from minus $6.4 million at the 10th percentile to $11.9 million at the 90th.

Post-Contract Prices

Recent PJM prices, which swung from about $40 per MWh in 2021 to $80 in 2022 and $31 in 2023, imply a volatility far too high to project over two decades. The model, following Schwartz (1997) and Pindyck (1999), treats market prices as reverting toward a long-run level tied to the cost of new generation, set at $55 per MWh in today's dollars. Post-contract revenue contributes a modest share of value after discounting, but as Module 4 showed, a 30 percent lower price would still turn NPV negative, which is why a longer contract would be valuable.

Recommendation

The Cumberland project is a reasonable investment only under conditions that reduce its risks. I recommend that the board approve development spending to proceed to financial close, conditioned on three outcomes. First, a PPA at $72 per MWh or better; at that price the base case is worth roughly $5 million and losses become less likely. Second, a builder who will fix the price at $1.20 per watt or less, taking most construction risk off Bayshore. Third, a second independent generation estimate that confirms the P50. If these conditions cannot be met, Bayshore should not build the project on the current terms, and should instead consider the Salem County acquisition from Module 2, whose operating history reduces generation uncertainty.

Presentation

The ten-minute presentation to the class follows the same order: the decision, the model's structure, the base case, the risks and the recommendation. It uses one chart for each idea: the cash flow profile over 35 years, the tornado chart from Module 4, the scenario bars and the simulated NPV distribution with the zero line marked. Each chart's title states its conclusion, such as "Four realistic changes each erase the value," so the audience can follow the argument from the titles alone.

Conclusion

This model brings together the course's methods: a structure that can be audited, sourced assumptions, a project finance cash flow and debt calculation, and three layers of risk analysis. It shows a project with a thin base-case margin and a large chance of loss, which better terms on price and construction could make attractive. The board should approve the project only when those terms are in hand.

References

Bodmer, E. (2015). Corporate and project finance modeling: Theory and practice. Wiley.

Esty, B. C. (2004). Why study large projects? An introduction to research on project finance. European Financial Management, 10(2), 213-224. https://doi.org/10.1111/j.1354-7798.2004.00247.x

Gatti, S. (2018). Project finance in theory and practice: Designing, structuring, and financing private and public projects (3rd ed.). Academic Press.

Hertz, D. B. (1964). Risk analysis in capital investment. Harvard Business Review, 42(1), 95-106.

Pindyck, R. S. (1999). The long-run evolution of energy prices. The Energy Journal, 20(2), 1-27. https://doi.org/10.5547/ISSN0195-6574-EJ-Vol20-No2-1

Schwartz, E. S. (1997). The stochastic behavior of commodity prices: Implications for valuation and hedging. Journal of Finance, 52(3), 923-973. https://doi.org/10.1111/j.1540-6261.1997.tb02721.x