14 Energy Project Financing: Resources and Strategies for Success
cost of the new system is $2.5 million. The expected equipment life is
15 years, however the process will only be needed for 5 years, after
which the chilled water system will be sold at an estimated market
value of $1,200,000 (book value at year five = $669,375). The chilled
water system should save PizzaCo about $1 million/year in energy
savings. PizzaCo’s tax rate is 34%. The equipment’s annual mainte-
nance and insurance cost is $50,000. PizzaCo’s MARR is 18%. Since
at the end of year 5, PizzaCo expects to sell the asset for an amount
greater than its book value, the additional revenues are called a
“capital gain” (equals the market value – book value) and are taxed.
If PizzaCo sells the asset for less than its book value, PizzaCo incurs
a “capital loss.”
PizzaCo does not have $2.5 million to pay for the new system,
thus it considers its finance options. PizzaCo is a small company with
an average credit rating, which means that it will pay a higher cost of
capital than a larger company with an excellent credit rating. (As with
any borrowing arrangement, if investors believe that an investment is
risky, they will demand a higher interest rate.)Table 2-2. MACRS Depreciation Percentages.
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EOY MACRS Depreciation Percentages
for 7-Year Property
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0 0
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1 14.29%
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2 24.49%
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3 17.49%
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4 12.49%
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5 8.93%
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6 8.92%
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7 8.93%
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8 4.46%
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