Mini Case: The Power to Cool Off in Florida (Indiantown Cogeneration Project)

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CFM3 Ch 10 Minicase The Power to Cool Off in Florida in $19 only

This case demonstrates the use of NPV, IRR, and financial ratios for evaluating a capital budgeting project.
Case Discussion:
The Indiantown Cogeneration Project involved the construction and operation of a coal-fired plant in Martin County, Florida, that produces electricity and steam. The capital cost (including interest during construction) was approximately $770 million. Since completion, it has an electric generating capacity of 330 megawatts (net) and a steam capacity of 175,000 pounds per hour. The project sells the electric power to Florida Power & Light Company (FPL) under a 30-year contract and the steam to Caulkins Indiantown Citrus Company under a 15-year contract.

FPL’s electricity payments have two parts: one for electric capacity and the other for the electric energy that it receives.

The project’s financing consisted of $630 million of 30-year 9% APR interest rate debt and $140 million of equity. The debt requires equal annual sinking fund payments of $31.5 million beginning in year 11. Depreciation is straight line to zero over 20 years. The tax rate is 40%. Other information about the project includes:


  • Electricity 2,500,000 megawatt-hours per year
  • Steam 525,000,000 pounds per year
  • Coal consumption 1,000,000 tons per year


  • Electric capacity payment $375,000.00 per megawatt (1% per year)
  • Electric energy payment 24.00 per megawatt-hour (4% per year)
  • Steam price 0.20 per thousand pounds (7% per year)
  • Coal price 29.00 per ton (4.5% per year)


  • Fuel delivery and waste disposal $20 per ton of coal (4.5% per year)
  • Operations and maintenance $15 million (3% per year)
  • Other operating expenses $15 million (3% per year)


1. Estimate the project’s CFATs for each of the 30 years.
2. Using a 7.15% cost of capital, and assuming a zero salvage value, calculates the project’s NPV and IRR. The $770 million project cost is the initial (time zero) cash flow. To find the IRR of the project, use a “guess” interest rate in Excel higher than the WACC.
3. The debt was issued a year before the project was completed. Calculate the interest coverage ratio and cash-flow coverage ratio for each of years 10 (the first year of the sinking fund, year 11 of the debt) through 20. (SHOW YOUR WORK.)
• Hint: When the project starts making sinking fund payments, annual interest expense will decrease.
4. Will the project be able to meet its annual debt service obligations? Explain your reasoning.


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