You have received the following email from Marcus Svenson, Finance Director:From: Marcus Svenson, Finance DirectorTo:...

You have received the following email from Marcus Svenson, Finance Director:

From: Marcus Svenson, Finance Director

To: Senior Finance Manager

Subject: Biomass proposal

Hi,

The Board has just heard a presentation by an engineering consultancy concerning a proposal to develop a biomass power station adjacent to our North Forest.

The Board has asked us to put together some thoughts about the merits of this proposal. We would proceed on the basis that we would build the power station and sell the resulting electricity to the national power generator which has a number of coal-fired power stations, each of which is nearing the end of its useful life and the coal has to be shipped in, so we should find it relatively easy to guarantee sales. The power generator has indicated that it would be possible to negotiate a three year contract in the first instance, with the expectation that this would be extended by subsequent three year contracts, subject to price and performance.

We would be responsible for building and operating the power plant and we would also have to pay for 50% of the cost of power lines for connecting to the national electricity grid, with the other 50% being funded by the national power generator.

Please draft a briefing paper that I can present to the Board on the following:

How can we predict whether the share price is likely to increase or decrease if we commit ourselves to this project? You should identify the challenges associated with answering that question and indicate how we might address them.

What are the long-term risks associated with future revenues from the sale of electricity? How might we manage these?

Marcus

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