Green energy is in the news these days, and the adoption of solar and wind power, as examples, is being encouraged through various types of tax credits and other incentives. This case presents realistic data regarding the decision to install solar power for three bank branches in Los Angeles. A base case spreadsheet is provided for you, so that you do not have to build that from scratch. Before considering the details of the assignment, study the spreadsheet to be sure that you understand how it was developed, and discover how the facts in the case regarding costs, taxes, incentives, efficiencies, and so on were incorporated into the spreadsheet.
The top portion of the spreadsheet presents model inputs from the case. Here it is important to pay attention to the units of measurement (W versus kW). The middle portion presents the year-by-year economics. An important factor here is accounting for both the accelerated depreciation (MACRS) and the tax implications of energy savings: without solar panels, energy cost is an expense that decreases taxable profit, but with solar panels, lower cost means more tax. The case does not present the details of the profitability and tax obligations per store (and they are not accounted for on the store level), but a reasonable assumption is that Wells Fargo earns a positive profit larger than its energy costs. Finally, the bottom part of the exhibit presents the present value calculations for the NPV over 12 years—the decision-maker’s goal, stated in the case, is over 30 years, the stated life-span of the project—and the payback period without accounting for the time-value of money. Assume the base case spreadsheet is correct, and do not try to change its logic.
Before beginning the assignment, please watch the video below which provides some additional background regarding the solar panel decision.
http://www.youtube.com/watch?v=mQDWywjH__w
Next, watch the instructional video below that provides an introduction into some Excel tools for sensitivity analysis, specifically one-way and two-way data tables. You may have to copy and paste this link into your browser.
There are several uncertainties that might be considered in a sensitivity analysis for Wells Fargo. For simplicity, focus your analysis on the 30 year NPV (cell B60). Please consider the following in your analysis:
- The SIP rebate rate is estimated to be $1.95/W. What if that rate turns out to be lower? It might be worth investigating how the NPV of the project would change if the SIP rate goes all the way to 0, by considering SIP rates of $1.95, $1.50, $1.05, $.75 or no SIP. Develop a one-way data table to explore these possibilities
- Develop a two-way data table that shows the calculation of the 30-yr NPV for SIP rates of $1.95, $1.50, $1.05, $.75 or no SIP, and also for 0%, 10%, and 20% price decreases in the estimated total system cost per KW.
- What if the annual degradation in the solar panels increased from 0.50% per year to 1.0% per year? You could assume some reasonable increments for this change.
- What if the federal tax credit were to be reduced?
Prepare a two-page discussion of a reasonable and “manager friendly” sensitivity analysis of this case. In conducting this analysis, I assume that you will use some one-way and two-way data tables. Show the most relevant tables in an Appendix to your two-page discussion of the sensitivity of the analysis to the changes in the input factors identified above.
