Financial Analysis Memo
Financial Analysis Memo
You are the Finance Director for the fictional Bonanza County School District in Washington state. The District operates 21 elementary schools built to a single plan when the county’s population surged 25-30 years ago. The heating, ventilation, and air conditioning (HVAC) systems now need to be replaced. The District’s Facilities Department recommends buying systems made by Energy International, Inc. (EII), which are made in Mexico. These systems each cost $624,000 and each will cost about $53,000 to install. Annual maintenance costs are $21,000 per system in the first year of operation, and these costs are expected to increase by 3.5% per year. A major overhaul is needed every five years at an initial cost of $49,000 per system (this means the first overhaul occurs in year 6 of your analysis). The cost of these overhauls increases by 25% with each successive overhaul, which reflects both inflation and the need for more parts as the systems age. The systems use natural gas and expected fuel costs are $104,000 per system in the first year, with this fuel cost expected to increase 3% per year over the life of the units. Starting in year 5 of your analysis, you should assume a 10% state carbon tax is applied to the cost of natural gas.
Several of the School Board members prefer “green” systems that reduce impacts on carbon dioxide emissions. They have asked you to consider an alternative system made by Green Girls, Inc. (GGI). The GGI systems rely on a combination of solar and wind power and thus have no fuel costs. However, the systems are much more expensive to purchase. Each system would cost $1,400,000 today and will cost about $226,000 to install (the installation cost is higher because changes are needed in wiring for the buildings). Annual maintenance costs are $14,000 per system in the first year, growing by 3% per year. GGI says that no major overhauls will be needed, but the batteries used by the system need to be replaced every 7 years (thus starting in year 8 of your analysis) at a cost of $62,000 per system (this cost is fixed and does not change over time). GGI systems are made in Bonanza County, so they support local jobs and avoid the carbon impacts of shipping systems from Mexico. GGI systems are eligible for a $45,000 per system Trump Administration “Buy American” tax credit, but the owners of GGI expect the price of their systems will have to be increased by 10% from the figures quoted above by the time the District makes its purchase due to the elimination of federal wind and solar tax credits.
Both the EII and GGI systems have an expected useful life of 20 years.
The District does not have funds available in the current budget to pay for these systems. Thus, LTGO debt (not supported by additional property taxes) will be issued to pay the initial capital costs, including installation. These bonds will be issued at the same time as the systems are purchased and installed. The bonds will have a 20-year term and will have level debt service at a projected 3.95% interest rate.
Your task is to analyze the life cycle costs of the EII and GGI systems and determine which one has the best net present value over the 20-year period. The life cycle cost includes the debt service on the bonds. The District uses a 4% discount rate.
One of the School Board members does not believe the District can afford to make this investment using existing revenues. Thus, she has suggested that the District ask the voters to approve a UTGO bond issue for the capital and installation costs of the systems (not the maintenance or operating costs). UTGO bonds typically have slightly lower interest rates, so assume these bonds would pay 3.7% interest over a 20-year term. You have been asked to determine the annual debt service on these voter-approved bonds for both the EII and GGI systems, and determine the first-year property tax bill for these bonds for the owner of a home valued at $340,000. Assume the total assessed value of property within the District will be $133.54 billion in the initial year debt service would be paid.
Your analysis should be summarized in a one-page memo with attached tables. Your memo should identify which system has the best net present value under the LTGO and UTGO options and explain what this means. You should note the first-year cost to the homeowner for both the EII and GGI systems if UTGO bonds are used. The memo should list any other issues or concerns that you believe should be considered in making the decision about which system to purchase.
Length and Format
1-page memo answering questions in the assignment
Tables, typically in the form of Excel spreadsheets, showing calculations
PDF format required
Paginate your assignment as a single PDF continuously from beginning to end
Please ensure that all spreadsheets will print on 8.5” x 11” paper