Reference no: EM131021414

This part of the assignment is about evaluating two project proposals. The main objective of this evaluation is to determine the financial and socio-economic viabilities of the two Investment proposals. Details of these proposals are provided below.

Proposal A

Proposal A envisages generation of electricity from water - a hydro-electric project. The capital cost of this project is estimated to be $6 billion (bn). The project will have a useful economic life of 50 years, and will generate 10,000 million (mn) units of electricity annually. Electricity produced by this project will be sold to the public at a tariff of 10 cents per unit for the first twenty years, and 8 cents thereafter. The annual operation and maintenance costs will be 6 percent of the capital cost for the first twenty years and 6.7 percent thereafter.

The socio-economic costs and benefits for this project can be estimated from Figure 1.

Proposal B

Proposal B is a thermal project - electricity will be generated from coal. It will cost $5bn to build. Its annual operation and maintenance will be 13 percent of its capital cost. This project will have a useful economic life of 25 years. It will generate 8,000mn units of electricity annually. Electricity from this project will be sold at 15 cents per unit. At the end of its useful life, this project can be sold for 1 percent of its capital cost.

The socio-economic costs and benefits for this project can be estimated from Figure 2.

Task

Your task is simply to summarize the results of your analysis in the answer-sheet provided separately.

Notes:

- You must provide the background details (i.e., select calculations), for various answers provided by you in the answer-sheet, in an Annexure (no more than two pages). The minimum permissible font size for the Annexure is 12 (Times Roman or equivalent). You must type-write your annexe e.

- The completed answer-sheet must however be a stand-alone document (i.e., the reader should be able to understand the entire logic behind your reasoning without necessarily needing to refer to the Annexure. The logic behind your reasoning, for each question, must of course be provided in the Annexure.

- Please tick (4) only one box wherever multiple choice is provided

Assumptions (common to both proposals)

- All capital costs are incurred at time t=0 (i.e., ignore project construction time).

- Economic (Social) costs and benefits (Figures 1 and 2):

- costs and benefits are all inclusive, i.e., costs include capital as well as operation and maintenance costs, and benefits include revenue and salvage value; costs and benefits remain unchanged throughout the useful economic lives of the two projects; and electricity market is a 'monopoly' market.

- The 'Real' discount rate for hydro project is 10 percent. The `Apparent' discount rate for thermal project is 18.97 percent. Inflation - applicable for both projects - is expected to be 3 percent. Coal price is likely to escalate by 5 percent.

I. Please summarize your results in the table below

	Financial		Socio-economic
	Proposal A	Proposal B	Proposal A	Proposal B
NPV
IRR
PB
LCC
EAC
B/C
CS
PS
TS

Note: NPV, LCC, and EAC, CS, PS, and TS must be rounded off to the nearest billion dollars (i.e., no decimal places); PB and IRR to the nearest whole numbers (i.e., no decimals), and B/C- to just one decimal place.

2. Which proposal wil you recommend from a financial perspective?

Why? Because

3. Which proposal will you recommend from a socio-economic perspective?

4. Will your recommendation (based on economic perspective) change if-due to malfunctioning technology - the useful economic life of project A gets reduced to 20 years)?

5. Will your recommendations (based on financial perspective) change if there was hyper-inflation over the useful life of this project (i.e.. the discount rate is infinite) and the price of coal escalates by 20 percent instead of the estimated value of 2 percent?

6. Will your recommendation (based on economic perspective) change if - due to depressed global financial situation - there is 5 percent deflation (instead of inflation).

7. What is the basis of your calculations (for Question I on page 1) - Real Terms or Nominal terms? Please provide justification in support of your claim.

8. Will your recommendation (based on economic perspective) change if evaluation is carried out with year twenty is the base year instead of year zero?

9. Will your recommendation (based on economic perspective) change if the construction time for each project is 5 years and the capital cost for each project is evenly spread over these five years?

10. Will your recommendation (based on economic perspective) change if - due to unanticipated depressed state of the economy - the government decides to provide electricity to consumers (generated by both projects) for free for the first ten years; at 5 cents per unit for the next ten years; and at 10 cents there-after?

11. Will your recommendation (based on financial perspective) change if 'interest free' capital is available to build the hydro project, while interest is changed on capital required for building the thermal project?