“Company Y is a multinational operating in India, with it’s headquarters in Mumbai. Company Y owns and operates various projects in the power sector – in generation & transmission. Company Y is in an expansion mode, trying to take advantage of the many opportunities in the Renewable Energy sector in India.
Company Y has received two alternative proposal for investing in a 100 MW solar plant – the first one is located in the state of Rajasthan, and the second one in Karnataka. Both the projects have their own tariff, expected generation (based on sunlight hours and quality) and also different asking prices by the Sellers. If Company Y has to choose between these two projects, which project should it invest in? Company Y invests in projects normally having an Internal rate of Return (“IRR”) of 15%.”
The data you have to calculate will be, fundamentally, the Profit & Loss and Net Cash-flows Of the two projects over 10 years (we will assume power plants last for only 10 years for this exercise). You will need the following:
1. Number of units of electricity generated from each of the plants?
2. The tariff from each plant for each of the 10 years, which the Company will give you for both plants.
3. The Revenue for the plant for each of the years which is number of units generated multiplied by tariff of each unit.
4. The Operating costs for each year
5. The asking price for each plant, so you know the depreciation for each year
6. The amount of costs funded by Equity and by Loans
7. The interest rate on the Loans
8. The above information should enable you to calculate the Profit & Loss account and the Net Cash flows for each of the 10 years for the two projects
9. You should research how to calculate IRR on Excel – with the information in 8 above, you will be able to calculate the IRR of both the projects
10. The Company should invest in the project with the higher IRR.
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