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1 Financial Evaluation
Financial evaluation involves real term expenditure and income scenario to predict
financial indicators like Internal Rate of Return (IRR), Benefit Cost Ratio (BC Ratio),
Debt Service Coverage Ratio (DSCR) and Payback Period etc.

1.2 Assumptions
Financial evaluation is based on a number of key assumptions and parameters. A
reference or base case for analysis was prepared and then sensitivity cases were
analysed. The principal criteria and parameters are discussed below.

1.3 Analysis Period

Main civil construction work of the project is assumed to start during dry season of Year
2018. Financial analysis period has been taken as 30 years after commercial operation

1.4 Project Benefits

Energy generated by the project will be supplied to a distribution utility, Nepal
Electricity Authority. The PPA tariff as per new revised rate is follows:
For six dry season months, mid Mangshir – mid Jestha (Dec to May) – NRs. 8.40/kWh
For six wet season months, mid Jestha – mid Mangsir (June - November) – NRs.
Prices will be escalated at 3% per annum for eight years from commercial operation
date and will be flat thereafter.

1.5 Construction Period

Project is assumed to complete within 4 years time after start of Construction.

1.6 Repair and Maintenance Cost

It has been assumed that 0.5% of the project cost will be required annually to meet
repair and maintenance cost including replacement costs. This value has been derived
from the experience of hydropower projects in the country. This cost will be escalated
annually by 5% after commissioning.

1.7 Depreciation
Depreciation rate applied is 3.33% percent per annum is used.
1.8 VAT
VAT @ 13% is payable to the government or its bodies have to be considered in the
financial evaluation.

1.9 Debt Equity

As hydropower projects are highly capital intensive, funds has to be obtained from
various financial institutions like banks, credit organizations. It is also imperative that
such a project could not be built solely on loans as the lender will require that the
Developer also put some funds. For the present study, debt-equity ratio of 70:30 has
been assumed.

1.10 Interest Rate

Loan amount will require some interest to be paid on the amount borrowed. The
interest will be capitalized till the project starts producing revenue. Generally, the banks
are charging 10% - 12% for such loans. For the present study, an interest rate of 10%
has been considered.

1.11 Loan Repayment Period

Debt portion will have a grace period equal to the construction period and the
repayment starts after the revenue generation starts. For this project, a loan repayment
period of 10 years has been used.

1.12 Other Charges

In addition, banks will charge service charges. These charges are bank specific and
assumed to be 1% of loan amount.

1.13 Disbursement
Major amount of the project cost is disbursed within construction period in the
proportion of 5% in the first year, 15% in the second year, 30% in the third year and
50% in the fourth year. However, annual cost including operation and maintenance cost
is spread over the period of the analysis. Similarly, the project benefits are received
during the operation period only.
1.14 Financial Analysis – Assumptions and Result
A preliminary financial analysis was carried out for cash flow of revenue and
expenditure. Analysis on dry season energy – 9.54GWh and wet season energy –
216.97 GWh was carried out for revenue calculation.

It has been assumed that debt equity ratio will be 70:30 with an interest rate of 10%
on debt. Royalties and taxes have been deducted from the revenue.

Table 14-1: Financial Analysis – Assumptions and Result

Basic Data

Base Year 2017

Construction Period 4Years
Start Year of Construction 2018

Financial Factors
Insurance Charges 0.5% of Total Project Cost

Financial Costs
Total Project Cost without IDC NRs. 8108.18 million
Total Project Cost With IDC NRs. 9331.93 million
Total Project Cost in USD without IDC USD 75.77 million
(1 USD = NRs. 107)

Debt : Equity 70 : 30
Loan Amount NRs. 5675.73 million
Interest Rate 10%
Loan Repayment (after commercial operation) 10 years
No. of payment per year 4.00

Energy Production
Firm or Dry Season 94.54 GWh
Secondary or Wet Season 216.97 GWh

Energy Prices
Energy Benefit
Dry Season Energy Price 8.40 NRs./kWh
Wet Season Energy Price 4.80 NRs./kWh
Estimated CoD 2022/2023
Escalation of Energy Prices 3%
Number of years for above escalation 8

Income Tax
Till 7thyear of operation 0%
8 -10 year of operation
th th
After 10 year of operation

Upto 15 years - Energy Royalty 2.00%
Upto 15 years - Capacity Royalty / kW installed (in NRs.0.00015
After 15 years - Energy Royalty 10.00%
After 15 years - Capacity Royalty / kW installed (in NRs.0.00120

Other Assumptions
Growth on Salary and Wages per year 3%
Depreciation (on project cost ) 3.33% (i.e. 30 years of CoD)
Repair and Maintenance (on project cost) 0.5%
R & M escalation per year after commissioning 5%
Insurance cost (after commissioning) 0.5% of project cost

Project Internal Rate of Return 16.39.66%
Equity IRR 25.98%
Project NPV NRs2643.86million
Project Benefit Cost Ratio 1.57
Average DSCR 1.77
Project Payback Period 5.20 years

Yearly Revenue Projection

Yearly Revenue Total on 100% Yearly Revenue Total on 90%

Year (in NRs. Millions) (in NRs. Millions)
5 1,835.63 1,652.06
6 1,890.70 1,701.63
7 1,945.77 1,751.19
8 2,000.83 1,800.75
9 2,055.90 1,850.31
10-35 2,110.97 1,898.87
1.15 Sensitivity Analysis (Project Cost with IDC)
1.15.1 At Project Cost with 10% Cost Over-run
Sensitivity test was performed by increasing the investment cost by 10% i.e. the project
cost will be NRs. 10265million.

Project IRR 14.96%
Project NPV NRs. 1914.65 million
Project BC Ratio 1.37
Average DSCR 1.60
Project Payback Period 6.1 years

Project’s IRR under this sensitivity test is well above the opportunity cost of capital of
10% and Net Present Value is positive. Average DSCR and Benefit Cost Ratio are more
than one as well. Therefore, the project is economically viable even with 10% increase
in investment cost and IDC.
1.15.2 At 90% of project revenue

Annual Sales Revenue (after 1st year of production) NRs. 1652.10 million
Project IRR 14.79%
Project NPV NRs. 1634.46 million
Project BC Ratio 1.35
Average DSCR 1.58
Project Payback Period 6.5 years

According to the results obtained, the project is economically viable even with 10%
decrease in revenue.
1.15.3 Interest Rate Increased to 12%

Project IRR 15.96%
Project NPV NRs. 2435.20million
Project BC Ratio 1.49
Average DSCR 1.58
Project Payback Period 6 years
According to the results obtained, the project is economically viable even with interest
rate at 12%.