XXXXXXXXXXA Case National Electric has plan to enter solar panel leasing business and have invited you to join as a partner. National Electric has plan to acquire panels sufficient to power 30 homes....

attached file


A Case National Electric has plan to enter solar panel leasing business and have invited you to join as a partner. National Electric has plan to acquire panels sufficient to power 30 homes. National Electric will incur cost of $2,000 for each installation. After that each home will operate maintenance free and generate approximately $100 per month of revenue for 10 years. The assumption is that due to rapid rate of technological depreciation there will be absence of demand and salvage value for these solar panels at lease expiry. Considering there will be 30% tax rate. For tax purposes the total cost of equipment and installation will be depreciated over 5 years in a straight-line depreciation. Required return has a beta of 2 and a debt-to-equity ratio of 1. The estimate is that the returns on a balance market portfolio are 11 percent, and the risk-free rate of burrowing is 3 percent. 1. Pretend you are partnering with National electric for this venture as all equity. What is the maximum price you should pay for this inventory of solar panels? Report all cash flows. Use APV/WACC method 2. Second assume the seller is asking $ 60,000 for the total inventory of solar panels. Also assume you can burrow $30,000 at 9% in the form of five-year, interest only loan, with the total principal retired through a balloon payment due in year 5. Should you invest in this venture? State clearly the annual cash flows and explain the computational method you are using. You can use APV of WACC formula. 3. Assume the seller will not take less than $52,000 for the panels that is needed. Finally National Electric have learnt that one in ten company that have gone into this type of business have gone into bankruptcy. What is your advice (Take into consideration the magnitude of financial distress costs in the event of bankruptcy). Note include detail explanation of the steps.