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'kmdu Ross {"'iCD Owner's Cash Flow Owner's annual cash flow is calculated as: Cash distributions ,'paid by the entity + investment and energy tax credits + tax benefits of book operating losses resulting from accelerated . depreciation - tax liabilities due on entity income. Owner's cash flows are presented in Exhibit H as cumulative cash flows. The solid line represents cumulative cash flows if the facility were to price its output using market revenues; the dashed line represents cumulative cash flows under the required revenue concept. Cash flows begin in 1983 as a cash outlay (initial investment) and become positive as tax benefits and positive cash flows are accumulated. Cash flows under the required revenue concept decrease after 1995 because owners distribution (a level payment) does not compen- sate for the tax liability generated by the retained earnings used to finance working capital requirements, fund the renovation and replacement fund, and make principal payments in excess of depre- ciation changes. One method of overcoming this phenomenon would be to include a return on retained earnings (pa~ticularly that amount used for the renovation and replacement fund) in the revenue requirements calculation and pass this return on to the owners. Of course, if such a return were included the required revenues would increase which would require higher unit prices than those depicted in Exhibit G. I Investment Payback Analysis ,'I,:: The concept of payback identifies a point in time when cumu- lativ~ cashflows equal the initial investment. Owner's payback is defined as that point in time when Cumulative Owner's Cash Flow (not discounted) is equal to total owner's capital investment. In Exhibit H initial investment is the line position in 1983; payback, or zero investment occurs in 1989, where the horizontal solid line (zero) is intersected. Internal Rate of Return i. The internal rate of return is defined as being the maximum rate of interest returned for the capital employed over the life of ani nv estment. Owner's internal rate of return is calculated as the discount rate, which, when applied to the stream of annual owner's cash ~_ flows over the twenty year life of the project yields a net present I value of zero when netted against the owner's capital investment. This results in an after tax internal rate of return of 19% under market-constrained revenues. - 19 -