Energy Project Financing : Resources and Strategies for Success

12 Energy Project Financing: Resources and Strategies for Success

to project. To keep the calculations simple, end-of-year cash flows are

used throughout this chapter.

Within the tables, the following abbreviations and equations are

used:

EOY = End of Year

Savings = Pre-tax Cash Flow

Depr. = Depreciation

Taxable Income = Savings – Depreciation – Interest Payment

Tax = (Taxable Income)*(Tax Rate)

ATCF = After Tax Cash Flow = Savings – Total Payments

• Taxes

Table 2-1 shows the basic equations that are used to calculate

the values under each column heading within the economic analysis

tables.

Regarding depreciation, the “modified accelerated cost recovery

system” (MACRS) is used in the economic analyses. This system indi-

cates the percent depreciation claimable year-by-year, after the equip-

ment is purchased. Table 2-2 shows the MACRS percentages for seven-

year property. For example, after the first year, an owner could depreciate

14.29% of an equipment’s value. The equipment’s “book value” equals the

remaining unrecovered depreciation. Thus, after the first year, the book value

would be 100%-14.29%, which equals 85.71% of the original value. If the

owner sells the property before it has been fully depreciated, he/she can claim

the book value as a tax-deduction.*

APPLYING FINANCIAL ARRANGEMENTS:

A CASE STUDY

Suppose PizzaCo (the “host” facility) needs a new chilled water

system for a specific process in its manufacturing plant. The installed

*To be precise, the IRS uses a “half-year convention” for equipment that is sold before

it has been completely depreciated. In the tax year that the equipment is sold, (say year

“x”) the owner claims only Ω of the MACRS depreciation percent for that year. (This is

because the owner has only used the equipment for a fraction of the final year.) Then on

a separate line entry, (in the year “x*”), the remaining unclaimed depreciation is claimed

as “book value.” The x* year is presented as a separate line item to show the book value

treatment, however x* entries occur in the same tax year as “x.”