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Project Valuation

Green Final

TermDefinition
What makes it difficult to value development businesses inherently risky business, low visibility of development pipeline, hard to quantify prospects of success, no comparables, because young industry it is significant amount of company valuation
Typical betas of renewable energy companies, utilities, IPPs slightly less than 1 on average, maybe 0.75, utilities 0.3, IPPS about 1
CAPM cost of capital = Rf + B*MRP
Other Cost of Capital r = Rd(1-T(c))*D/V + Re(E/V)
Dividend Growth Model Return on Equity = (Div1/P0) + g
How do you account for construction costs Discount at risk free
cost of capital for the development period first, calculate the NPV at project completion. Then calculate the NPV at year zero (KEY: DISCOUNT CONSTRUCTION COST AT RISK-FREE RATE BUT CASH FLOWS AT COST OF CAPITAL), then figure out what you *discounted* by
BETA FORMULA Basset * PVasset = Bconstruction * PVconstruction + Bnet * PVnet BUT Bconstruction is zero
PVasset pv of cash flows (back to year 0)
Bconstruction 0 because discount at risk free rate because we are guaranteed to incur
PVnet NPV of project in development (year zero)
What risk is accounted for in valuation we used assumes commercial and regulatory success, risk is because there is a future liability and additional investment required before completion
NPV of project this is construction cost at completion then PV of cash flows, essentially this is the value if construction costs incurred overnight
NPV of project in development this accounts for the construction time
How to think of the risk of the net value what is the risk you don't get the project completed essentially
How to otherwise account for risks Take expected value of outcomes then discount
Created by: zkogut7
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