INVESTMENT

ANALYSIS OF
SOLAR
POWER
PROJECT
DONE BY
SABARISH GNANARAJ P
2113084
PGDM SEC- A
 SOLAR POWER
• Solar power is a sustainable energy resource, whereas fossil fuels are
unsustainable energy resource.
• Solar energy is harnessed in two ways:
 Solar photovoltaic – solar energy into electricity.
 Solar thermal – solar energy into heat.
• Solar PV system:
 On-grid – without battery.
 Off-grid – with battery.
 S.M & COMPANY
• 1 Megawatt Solar Project
 Initial Investment-Rs.5,00,00,000
 Output-14,91,600 units
 1% annual reduction in output
 Expected Life-25 years
 Maintenance cost-1.4% of project cost & 5.72% escalation
 Tariff (Price/unit)-Rs.6.35
 Annual Hike in tariff-2%
 Discount rate-12%
• Tax rate 35%, Accelerated depreciation-40% of asset, first two years, 20% in third year.
• Tax rate 25%-No accumulated depreciation
CAPITAL BUDGETING TECHNIQUES
• TRADITIONAL TECHNIQUES:
 Accounting Rate of Return:
 Return On Investment (ROI)
 Accept the project if actual rate of return > expected rate of return
 ARR = (Avg. accounting profit / Initial investment) * 100
 Payback period :
 Time taken to recoup initial investment
 Lesser payback period is preferred.
 Payback period = (Initial investment / Avg. annual cash inflow)
CAPITAL BUDGETING TECHNIQUES
• DISCOUNTED TECHNIQUES
 Net present value(NPV):
 Best method of capital budgeting
 NPV=Present value of cash inflow-Present value of cash outflow
 Internal rate of return (IRR):
 Interest rate at which NPV=0
 Accept the project if IRR > Required Rate of Return
 Profitability index(PI):
 PI = PV of cash inflow / PV of cash outflow.
 Accept the project if PI > 1.
 Discounted payback period
 Same as payback period, Considers time value of money
 CAPITAL BUDGETING
WITH PERVIOUS TAX RATE OF 35%, INCLUDING ACCELERATED DEPRECIATION:
(DATA TAKEN FROM EXCEL)
• Accounting Rate of Return-8.7%
• Payback period-7.02 years
• Discounted Payback period-18.08 years
• Net Present Value-Rs.3555059.12
• Internal Rate of Return-13%
• Profitability Index-1.07
Here, NPV is positive. So, S.M & Company can invest in the project.
 CAPITAL BUDGETING
WITH NEW TAX RATE OF 25%, INCLUDING STRAIGHT-LINE DEPRECIATION: (DATA
TAKEN FROM EXCEL)
• Accounting Rate of Return-10.8%
• Payback period-6.95 years
• Discounted Payback period-15.49 years
• Net Present Value-Rs.7160678.137
• Internal Rate of Return-14%
• Profitability Index-1.14
Here also, NPV is positive. So, S.M & Company can invest in the project.
 WHICH OPTION IS BETTER?
Option 2 is better, because,
• ARR has increased by 24.1%
• Payback period has reduced by 1%
• Discounted Payback period has reduced by 14.3%
• NPV has increased by 101%
• IRR has increased by 6.67%
• PI has increased by 6.73%
THANK YOU