Course Ruler

MBA643 | Evaluation of Whether Tilt Renewables Should Undertake the Snowtown Solar Energy Project

Statement

Based on the analysis, Tilt Renewables should undertake the Snowtown Solar Energy Farm project.

Justification

Calculation of the future cash flows of the project shows that Snowtown Solar Energy Farm will generate adequate cash for Tilt Renewables. Based on the calculations, the sum of the future cash flows for the ten years will be $101, 308550.10. With an initial project outlay of $100,000,000, the project will generate $1,308,550.10 by the tenth year. This shows that the future cash flows will have a positive balance, attributing that the project is feasible. The feasibility of the project can be based on the positivity of the future cash flows and the profits that it will generate for the company.

As the project manager, I would advise Tilt Renewables to undertake the project due to the positive future cash flows and the potential profitability of the project. Since the project has positive future cash flows, there will be minimal need for additional funding based on the budget. The project will generate annual revenue that can be used to meet the expenses for running and monitoring the solar farm project. The project will generate annual future cash flows that can be used for managing project costs.

Based on the calculation of the Net Present Value (NPV), the company should undertake the project. The project has a NPV of $1,308,550.16. In this case, the sum of the discounted cash flows is greater than the sum of the discounted cash outflows. The project will generate more cash compared to the costs that will be attributable to running and monitoring the project. Due to the positive NPV, the Tilt Renewable will receive more economic benefit than it will put out for running the Snowtown solar project. Positive economic benefits attributable to the project shows that the Snowtwon Solar project will generate material revenue for the company in the long run. The project will be beneficial to the company due to the lack of constraints attributable to cost of running the project. Due to the positive NPV, the project will contribute positively to the overall income of the company and also cater for the project costs.

A negative NPV would attribute that the company’s future cash flows over a given period of time does not exceed the initial project outlay. A project with a negative NPV is not profitable over the period, hence it would not be advisable to invest in such a project. NPV plays a leading role in determining the profitability of a project, Tilt Renewable should take this into account by considering the positivity of the NPV. According to Miecarz and Paszczyk (2010), NPV is a useful tool in determining the risk perception of an investment or a project.

The value of the NPV can determine whether the project will be profitable in the long run, hence it is useful in determining the expected returns which is useful in calculating risks. In this case, the company can focus on the NPV to determine the risk perception of the project in terms of profitability. A profitable project is more likely to be less risky as compared to a project with negative NPV. Therefore, Tilt Renewable should focus on the NPV as a key determinant of the profitability and viability of the project in the long run.

The NPV contributes take into account the CO2 emission reductions that the project will promote environmental protection. Notably, the primary objective of the project is to reduce carbon emission by ensuring that there is clean solar energy for consumption. The project directly contributes to the reduction of C02 emission, the selection of the project will contribute to overall environmental protection. According to the estimates, the $100 million project will generate up to 50 MW of renewable energy enough to power over 18,000 homes and offset 85,000 tonnes of C02 produced by coal-fired electricity generation each year (Tilt Renewable, 2020). The selection of the Snowtown Solar project based on its positive NPV shows that the NPV will contribute a long term reduction of C02 emissions.

The company should take reduction of C02 into account since it is one of the primary goals of the organisation. With the increasing focus on renewable energy globally, it will be essential to play a leading role in CO2 reduction by implementing this project. Investors are more likely to consider a company that focuses on environmental protection, hence Tilt Renewable should take the project into consideration.

Based on the estimates, the maximum output of the solar project will result in significant increase in peak generation from the wind farm (Tilt Renewable, 2020). The expected contribution of the project in the reduction of C02 emission is crucial in achieving the global goal of environmental protection. The NPV should take CO2 emission into account because it can be used to determine the cost effectiveness of the project. In other words, the project will reduce the cost of environmental protection, thus contributing to a higher returns attributable to the company. Based on the reduction of the cost of environmental protection, NPV should take into account the C02 emission.

In 2019, Tilt Renewable recorded a debt to equity ratio of 1.337, which is less than 2. The company recorded total liabilities amounting to $876,798,000 and total shareholders’ equity amounting to $655,976,000 (Annual Report, 2019). The high amount of liabilities contributed to low debt to equity ratio. This shows that large percentage of the company’s operations is financed by debt capital. This ratio is fairly significant as compared to other utility companies in the industry.

Companies that have debt to equity ratio below 2 should increase their leverage by attracting more equity. An increase in shareholders’ equity will attribute to a high debt to equity ratio.  High debt to equity ratio shows that a large percentage of the company’s operations is financed by equity and not debt. A company with a high debt to equity ratio can attract many investors due to the low risk exposure of the firm.

According to source 3, the current share price of the company is $8.01 as compared to $1.27 when the company was first listed in ASX in 2016. The current price shows a difference of approximately $6.74 compared to the initial issue price in 2016 (Yahoo, 2022). The difference in share price can be attributed to the company’s increased performance and focus on renewable energy. With the increasing focus on renewable energy consumption, many investors are more likely to invest in companies that focus on environmental protection. Tilt Renewable is one of the utility companies that play a leading role in reducing C02 emission, thus contributing to environmental protection. Also, the profitability of the business can be attributable to the increase in share prices.

As the company records more profits and issuance of dividends, its shares are more likely to be attractive, leading to an increase in the price. The difference in the share price of the company can also be associated with the increase in demand of the company’s shares in the stock market. Investing in renewable energy projects such as Snowtown Solar project will have a positive impact on the company’s share price; many investors are likely to be attracted by the company’s outlook.

References

Annual Report. 2019. Tilt Renewable. file:///C:/Users/User_1/Downloads/Tilt_Renewables_Annual_Report_2019_Web.pdf

Mielcarz, P. & Paszczyk, P. 2010, “Increasing Shareholders Value through NPV-Negative Projects”, Wspólczesna Ekonomia, vol. 4, no. 3, pp. 119.

Tilt Renewable. 2020. Snowtown North Solar Farm. https://www.tiltrenewables.com/assets-and-projects/Snowtown-North-Solar-Energy-Farm/

 Yahoo Finance. 2022. TLT.NZ. https://au.finance.yahoo.com/lookup?s=TLT.NZ