SPS: THEIR FINANCING AND MACROECONOMIC EFFECTS Robert S. Block 734-3820 Locust Walk - High Rise East University of Pennsylvania, Philadelphia, Pennsylvania 19104 Any financial decisions concerning SPS's would have many effects on my generation. My concern with the SPS project focused on the profitability of the project, the source of the capital for the project and the macroeconomic effects of the capital flow. I based my calculations for the profitability of the SPS project on the 1977 Boeing Baseline Reference System. Thus I assumed construction costs of $24.75 billion incurred evenly over the four years of construction, yearly maintenance costs of $328 million incurred over the thirty-year life. Revenue received each year was the percent of solar cells still operational times io Gw times 8760 hours per year divided by 1000 to give 8.76 x 1010 kwh per year times percent of solar cells still operational. The tax rate for the private sector was assumed to be 40%. The cost of capital to the project presented a special problem. Cost of capital is directly related to risk. Historically, the return to capital in the stock market has been 9%. Since this project is somewhat riskier than the average of the stock market, I felt a good and reasonable cost of capital to be 12%. I also computed my profitability model based on costs of capital of 9% and 15%. The model I used to compute the profitability of the project was its net present value. The present value of the cash inflows are subtracted from the present value of the cash outflow. If the result is positive then the project is profitable. If the result is negative then the project is unprofitable. I considered the net present value for private industry and government ownership. For both private industry and government the outflows are the construction costs and maintenance costs. These are discounted back to the present. The inflows for private industry are the aftertax revenue each year, the after-tax savings on the amortization of maintenance costs and the tax savings from the depreciation of construction costs since it is tax deductible. For government the only inflows are the revenues since there is no amortization, depreciation or taxes. The inflows are then discounted back to the present to get their present value. In performing the net present value I varied the inflows by varying the rate charged per kwh in the revenue calculation. I was interested in several things: Is the venture profitable, at what level is the project profitable and where does the government ownership become more profitable than private ownership because of taxes. I was more concerned with whether or not the project was profitable rather than the exact magnitude of profitability. At a discount rate of 12% the project yields a profit of $28 billion at a charge of 4^/kwh which is the level of rate charges now in the electrical industry. The projects are equally profitable at 29^/kwh. It seems then that private industry provides the greatest profitability for this project. (See Table 1). As can be readily seen if the cost of capital becomes lower than 9% then governmental ownership becomes more feasible. I next sought to determine where the capital would come from for the project. Private industry could sell stock or float bonds. However, it seems highly improbable that any private company would be able to obtain equity or lever itself to the sum required for the project. This is especially true when one considers that much of the financing is front-end. It seems, then, that govern-
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