Radhika Sarda

um14104@stu.ximb.ac.in
Amiya Arnav

1. Commenting on the financial position of the company

Debt Equity Ratio: Debt equity ratio considered is 2.33, which is high even for power sector
companies.ABC has applied to take 70% loan. It shall be highly leveraged company. It should
schedule its loan repayment schedule after considering the cash flows projected.
Also it has decided to take Bank Guarantee for delay in completion of project construction
,which shall help in sustaining the company in case of delays in project which are common in
power sector.
Current Assets: Other information as to the current assets etc of the company are not available
so as to comment on them. Also these will be relevant once the project is completed and ready to
start.
Bottom Line: The PAT margin of average 12% and on basis of trend to be 16% is high in this
sector and the company shall be quite profitable and healthy if it can maintain such high PAT
margin.

2. Comments on Project Cost Comparison of similar projects:As compared to the capacity of the project, the project costs are decent and comparable to that of
similar units financed subject to a few observations:1. Land cost of two projects cannot be simply compared as land cost depends on the
location, proximity to transport facilities, etc Also here the land is to be provided free
from all encumbrances by the GoJ, in other cases this factor would have been included in
the land cost or not is a question .
2. The other projects may not necessarily be Mega power projects where no taxes have been
considered in civil and mechanical costs. The cost of other two projects may be inclusive
of these costs and hence be higher.
3. Contingencies are assumed at 3% on hard cost and 10% on pre operative costs. We do
not know the assumption used in other projects.
4. The current cost of the machinery has significant impact on the future operating
expenses. Here the projects have not been compared based on the operating expenses, but
solely on the asset costs.
5. Non-EPC costs are a part of this project, may not necessarily be part of other projects.
Also there may be components whose cost has been included in other projects, but not
included in ABCs project.
Some other criteria to compare project costs which have not been considered here:1. Overall efficiency of the projects and standby losses
2. Operating and maintenance costs

3. Proximity of coal mines and hence transportation cost of the raw material play a major
factor in the cost.

3.IRR for Punjab, PTC and Jharkhand . Comments on usefulness of IRR in

evaluating the project
On the basis of Income statement given, the cost have been apportioned based on the quantity
(units) sold to the respective locations.
The terminal values are taken using average costs and average sale quantities from each
location . The sale price per unit is taken for the captive coal blocks and not from CIL as the CIL
contract expires in 15 years. A 5% discount rate (based on current industry average data) is
considered to discount the perpetuity.
The cost of the project has been apportioned based on the capacity utilized to sale to different
location.
Cash flows (in Rs. Cr) on the basis of these assumptions are as follows:Capacity for
this
% capacity
Initial
investment
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Terminal
Value
IRR

Jharkhand

PTC

Punjab

Total

1676.5
25.08

2742
41.01

2267
33.91

6685.5
100.00

-1055.98
0.75
22.00
21.48
33.23
46.48
46.43
46.72
45.72
45.72
45.66
45.96
46.71
48.21
48.16

-1727.11
1.63
46.53
46.05
65.00
87.77
87.09
86.54
85.90
86.26
86.93
86.39
87.98
89.16
90.83

-1427.92
1.62
18.47
84.47
86.77
88.75
93.49
97.74
101.38
106.02
111.40
113.65
118.31
123.63
128.01

-4211
4.00
87.00
152.00
185.00
223.00
227.00
231.00
233.00
238.00
244.00
246.00
253.00
261.00
267.00

1125.76
4%

2060.60
5%

5066.96
12%

8253.32
8%

The IRR for Punjab is the highest at 12%, which means it is most profitable among all the
projects to sale to Punjab. However IRR must be compared to expected rate of return from the
project and only if the IRR is greater thatn the expected rate of return , the project should be
accepted.
Usefulness of IRR method:
Simplicity: The IRR method is very clear and easy to understand. An investment is considered
acceptable if its internal rate of return is greater than an established minimum acceptable rate of
return or cost of capital
Time Value of Money: The IRR method also uses cash flows and recognizes the time value of
money.
Effeciency: The internal rate of return is a rate quantity, an indicator of the efficiency, quality,
or yield of an investment.
Hurdle Rate / Required Rate of Return is Not Required: The hurdle rate is a difficult and
subjective thing to decide. In IRR, the hurdle rate or the required rate of return is not required for
finding out IRR. It is not dependent on the hurdle rate and hence the risk of wrong determination
of
hurdle
rate
is
mitigated.

4. Comments on the viability of the project

Based on the information used in the above answer, the overall IRR of the project is at 8%. The
cost of capital for discounting is taken at 5% (which is the industry average for power sector
presently).
Hence the project looks viable financially and funding it will be a good option. However if the
rate of interest is above 8%, then the proposal must be reconsidered based on that.