AC6101 International Project Finance Assessment Sem1 2025/26 | UCC

AC6101 International Project Finance Assessment

Capital investment appraisal under certainty and uncertainty; Capital investment appraisal using real options; Capital structure: Debt and the weighted average cost of capital; Structuring International Projects.

Learning Outcomes

On successful completion of this module, students should be able to:

• Apply capital investment appraisal tools to different types of projects.
• Use real options to appraise projects.
• Estimate the cost of financing new domestic and international projects.
• Identify and apply appropriate financing solutions for international capital investments.
• Discuss the financing and structuring of environmentally sustainable projects

Question One

Agency Costs and Ownership Structure 
Journal of Finance, Vol. 55, No. 1, February 2000 
Ang, Cole and Lin (2000)

Critically discuss this paper. Your discussion should include a consideration of:  

- The research questions addressed. 
- Existing research cited by the authors. 
- The sample and methodology used to address the research questions. 
- The findings and contribution of the study. 
- The implications of the research findings for academics and investors.  

Question Two

Galaxy  Motors  plc  is  negotiating  a  joint  venture  hydrogen  vehicle  engine  manufacturing project. Its partner is Hydro Energy plc, which has developed a prototype hydrogen fuel cell for powering cars. The proposal is that Galaxy and Hydro would each contribute €50,000,000 to finance the project. Galaxy has analysed the proposal and based on reasonable assumptions, expects  the  project  to  generate  a  negative  NPV  of  (€2,300,000)  on  its  investment  of €50,000,000. It has declined to invest.  Hydro needs a vehicle manufacturer as a partner in this project and is very confident of its success. It has offered to agree to buy out Galaxy’s share in the joint venture 3 years after the project commences for €40,000,000 if Galaxy wants to exit the investment.  Volatility (standard deviation) in returns from car manufacturing is estimated at 30% per year. The risk-free rate of return is 1%. Galaxy is now considering this revised proposal. 

Required:

(i)  Explain  how  the  real  option  available  to  Galaxy  could  be  valued  using  the  Black-Scholes model and map the project characteristics onto the Black-Scholes variables.(10 Marks)
(ii)  Should Galaxy invest in this project on the revised terms offered by Hydro? Clearly explain your answer.(20 marks)
(iii) There was significant disagreement amongst the financial analysts in Galaxy about the volatility  of  returns  from  a  project  of  this  nature.  Some  analysts  argued  that  the appropriate  volatility  is  significantly  higher  than  30%.  Briefly  comment  on  the implications  for  the  investment  if  these  analysts  are  correct.  Calculations  are  not required for your answer.(5 marks)  (Total 35 Marks)

Question Three

Oregan  Renewables  plc  planning  to  develop  a  wind  farm  off  the  coast  of  Dublin.  It  has historically  financed  projects  using  corporate  financing  but  is  considering  using  a  project finance structure for this investment.  It intends incorporating NewCo., a Special Purpose Vehicle, to develop the wind farm. It would operate the facility for 4 years and then sell it. The wind farm would be developed at the outset of the project (time 0) and would require an investment of €20,000,000. It expects to sell the facility at the end of year 4 for €1,000,000. Due to Government tax incentives, the sale of the facility would not be subject to tax.

NewCo.  will  enter  into  a  contract  to  sell  all  electricity  at  a  pre-agreed  price  of  €1,100  per MegaWatt Hour. Payment will be received for electricity at the end of the year it is produced. Total costs are expected to be €300,000 in each year. Capital Allowances will be €1,000,000 per year.  The marginal corporation tax rate is 50%. Oregan has estimated that the unlevered Beta for a listed wind  energy firm, with  a similar risk  profile to  NewCo.,  is 0.70.  The  project will  be financed with a 7.5% fixed rate project loan of €17,000,000, with the remainder financed using an  equity  investment  from  Oregan.  Interest  is  payable  annually,  capital  repayments  of €5,500,000 (end Year 1), €5,500,000 (end Year 2) and €6,000,000 (end Year 3) will be made. The risk-free rate is 1% and the market risk premium is estimated to be 5.5%. 

Required:

(i)  Using the Adjusted Present Value (APV) approach, estimate the value of this project. (25 Marks)
(ii)  Discuss the agency cost motivation for using project finance structures (10 Marks) (Total 35 Marks)

Question Four

IT Solutions Plc. is listed on the London Stock Exchange. It operates in two distinct sectors, its IT  Infrastructure  Division  (IID)  develops  hardware  and  software  systems  for  public  sector clients  and  its  Consumer  Division  (CD)  develops  hardware  and  software  products  for consumers. It is considering bidding for a contract to develop a new health information system for the UK Government. However, initial analysis indicates that the IRR of this project would be below the company’s WACC. The Managing Director of the IID argues that this WACC is not appropriate for projects in her Division as they are less risky, on average, than the firm as a whole. The CEO of IT Solutions is unconvinced and argues that the Managing Director is trying to make the project appear more attractive than it actually is.

The IID and the CD account for approximately 35% and 65% of company profits respectively.  Estimates of IT Solutions’s beta are 1.4 (estimated over 60 days), 1.1 (estimated over 2 year) and 1.5 (estimated over 60 months).  IT  Solutions  has a  target  Debt to  Value  ratio of  0.6/1. Estimates of the Equity Risk Premium are 7.0% (estimated over 1 year), 6% (estimated over 10 years) and 5.50% (estimated over 75 years). The marginal corporation tax rate is 35%.

UC’s  debt  comprises  traded  bonds,  with  a  par  value  of  £1,000  and  10  years  remaining  to maturity, which pay a semi-annual coupon (annual coupon of 6%) and are trading at £1,065 today.