Power Up PLC - Financial Decision Making

8/9/2019 Power Up PLC - Financial Decision Making

1/19

POWER UP PLCFinancial Analysis

Yasir Irshad


2/19

pg. 1POWER UP PLC Financial Analysis

Table of Contents

Introduct ion ................................ ................................ ................................ ................................ ....... 2

Ana l i -Gas Powered P lan ................................ ................................ ................................ ............... 4

Ana l

sis-Nuclear Powered P lan ................................ ................................ ................................ ......... 6Ana l sis-R enewa l Energy P lan ................................ ................................ ................................ .......... 8

NPV and WA CC ................................ ................................ ................................ ............................. 10

Ana lysis and Adv ice on Project(s) ................................ ................................ ................................ ... 11

Project Eva luation ................................ ................................ ................................ ........................... 12

Discount R ate Ana lysis ................................ ................................ ................................ .................... 14

Supp lementary Informat ion ................................ ................................ ................................ ............. 15

Cr itical R ef lection on Learn ing Outcomes................................ ................................ ........................ 16


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I ntroduct ion

Power Up P lc is a major e lectr icity supp lier and has been generat ing e lectr icity through the

use of coa l at the ir coa l powered stat ion. R ecent deve lopments and government po licy have

led to a c losure of many coa l powered stat ions so Power Up is p lann ing ahead by cons ider ing

alternat ive means of generat ing e lectr icity.

Three a lternat ives ex ist and the company is cons ider ing the ir opt ions of:

Investing in a Gas powered stat ion

Investing in a Nuclear powered stat ion

Or invest ing in a R enewab le Energy Powered Stat ion

Through f inanc ial Ana lysis we can conduct var ious types of assessments of var ious aspects

of bus iness or a project. It can a lso he l p us in f inding out if the proposed project or proposed

bus iness comp letely or a part of it is feas i ble, steady and ga infu l in monetary terms.

Financ ial Ana lysis is ma inly carr ied out by f inanc ial spec ialists us ing spec if ic rat ios and

informat ion wh ich is co llected from f inanc ial stat istics and other re lated reports. F inanc ial

ana lysis and reports he l p management in mak ing the dec ision.


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In lieu of f inanc ial ana lysis report the management of the project or company can dec ide

upon the be low ment ioned factors.

Future of the ent ireproject or a part ial project.

Decisions regard ing the mater ials wh ich can be used in product ion or manufactur ing

of product.

Acquisition or lett ing/h ir ingequ i pment or bu ilding.

Decisions re lating to issue of stock or on negot iating a bank loan to increase

bus inesss work ing cap ital.

For decision regard ing other dec ision like cap ital investment or lending.


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POWER UP PLC Financial Analysis

nalys is-Gas Powered Plan

Y 0 Y 1 Y 2 Y 3 Y4 Y5 Y6 Y7 Y8 Y9 Y

vestment Flows

uilding Cost -300 -300

itial Investment at year 0 -515.67

et I nvestment Flows -515.67 0 0 0 0 0 0 0 0 0

perat ing Flowsevenues:rect R evenues 500 500 500 500 500 500 cens ing & Anc illary 300 300 300 300 300 300

osts:as Purchase -300 -300 -300 -300 -300 -300

ustomer Care & R elations -5 -5 -5 -5 -5 -5

bour Cost-80 -80 -80 -80 -80 -80

les, Market ing & Promot ions -40 -40 -40 -40 -40 -40

her Costs -4 -4 -4 -4 -4 -4

ean up Cost

perat ing Prof it 371 371 371 371 371 371

come Tax -129.85 -129.85 -129.85 -129.85 -129.85 -129.85

et Operat ing Flows 241.15 241.15 241.15 241.15 241.15 241.15 24

emo lishing Cost -20

apital Allowance 21 21 21 21 21 21

et Cash Flows -515.67 0 0 0 242.15 262.15 262.15 262.15 262.15 262.15 262.1


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A nalys is-Nuclear Powered Plan

Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y

I nvestment FlowsBuilding Cost -1675 -1675

Initial Investment at year 0 -3350.00Net I nvestment Flows -3350.00 0 0 0 0 0 0 0 0 0

Operat ing FlowsR evenues:Direct R evenues 500 500 500 500 500 500 Licens ing & Anc illary 500 500 500 500 500 500

Costs: Nuclear R eactor Boost ing -155 -155 -155 -155 -155 -155Customer Care & R elations -25 -25 -25 -25 -25 -25Labour Cost -25 -25 -25 -25 -25 -25Sales, Market ing & Promot ions -40 -40 -40 -40 -40 -40Other Costs -30 -30 -30 -30 -30 -30Clean up Cost

Operat ing Prof it 725 725 725 725 725 725 Income Tax -253.75 -253.75 -253.75 -253.75 -253.75 -253.75R edundancy Cost -50

Net Cash Flows 421.25 471.25 471.25 471.25 471.25 471.25 47

Demo lishing Cost -20Capital Allowance 117.25 117.25 117.25 117.25 117.25 117.25 117

Net Cash Flows for Project -3350.00 0 0 0 518.50 588.50 588.50 588.50 588.50 588.50 588.50


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A nalys is-Nuclear Powered Plan

Y15 Y16 Y17 Y18 Y19 Y20 Y21 Y22 Y23 Y24

I nvestment FlowsBuilding Cost

Initial Investment at year 0Net I nvestment Flows 0 0 0 0 0 0 0 0 0 0

Operat ing FlowsR evenues:Direct R evenues 500 500 500 500 500 500 500 500 500 500 Licens ing & Anc illary 500 500 500 500 500 500 500 500 500 500

Costs: Neuc lear R eactor Boost ing -155 -155 -155 -155 -155 -155 -155 -155 -155 -Customer Care & R elations -25 -25 -25 -25 -25 -25 -25 -25 -25 -Labour Cost -25 -25 -25 -25 -25 -25 -25 -25 -25 -Sales, Market ing & Promot ions -40 -40 -40 -40 -40 -40 -40 -40 -40 -Other Costs -30 -30 -30 -30 -30 -30 -30 -30 -30 -Cl ean up Cost

Operat ing Prof it 725 725 725 725 725 725 725 725 725 725 Income Tax -253.75 -253.75 -253.75 -253.75 -253.75 -253.75 -253.75 -253.75 -253.75 -25R edundancy Cost

Net Cash Flows 471.25 471.25 471.25 471.25 471.25 471.25 471.25 471.25 471.25 471.25

Demo lishing CostCapital Allowance

Net Cash Flows for Project 471.25 471.25 471.25 471.25 471.25 471.25 471.25 471.25 471.25 471.25


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s is-Renewal Energy PlanY0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9

ment Flowsing Cost -2000 -2000

l Investment at year 0 -4000.00nvestment Flows -4000.00 0 0 0 0 0 0 0 0 0

ting Flows

nues:t R evenues 500 500 500 500 500 500 s ing & Anc illary 380 380 380 380 380 380

mer Care & R elations -20 -20 -20 -20 -20 -20r Cost -10 -10 -10 -10 -10 -10Market ing & Promot ions -100 -100 -100 -100 -100 -100Costs -20 -20 -20 -20 -20 -20

t ing Prof it 730 730 730 730 730 730 e Tax -255.5 -255.5 -255.5 -255.5 -255.5 -255.5

ndancy Cost -60

ash Flows 414.5 474.5 474.5 474.5 474.5 474.5

lishing Cost -20al Allowance 140 140 140 140 140 140

ash Flows for Project -4000.00 0 0 0 534.50 614.50 614.50 614.50 614.50 614.50 614.50


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A nalys is-Renewal Energy PlanY15 Y16 Y17 Y18 Y19 Y20 Y21 Y22 Y23 Y24

I nvestment FlowsBuilding Cost

Initial Investment at year 0Net I nvestment Flows 0 0 0 0 0 0 0 0 0 0

Operat ing FlowsR evenues:Direct R evenues 500 500 500 500 500 500 500 500 500 500 Licens ing & Anc illary 380 380 380 380 380 380 380 380 380 380

Costs:Customer Care & R elations -20 -20 -20 -20 -20 -20 -20 -20 -20 -Labour Cost -10 -10 -10 -10 -10 -10 -10 -10 -10 -Sales, Market ing & Promot ions -100 -100 -100 -100 -100 -100 -100 -100 -100 -1Other Costs -20 -20 -20 -20 -20 -20 -20 -20 -20 -

Operat ing Prof i t 730 730 730 730 730 730 730 730 730 730 Income Tax -255.5 -255.5 -255.5 -255.5 -255.5 -255.5 -255.5 -255.5 -255.5 -2R edundancy Cost

Net Cash Flows 474.5 474.5 474.5 474.5 474.5 474.5 474.5 474.5 474.5 474.5

Demo lishing CostCapital Allowance

Net Cash Flows for Project 474.50 474.50 474.50 474.50 474.50 474.50 474.50 474.50 474.50 474.50 4


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All the f igures used in F inanc ial Ana lysis are in m illions.

Gas Powered Plan Nuclear Powered Plan Renewa

NPV 1089.4927 194.6222

W A CC 10.72% 0.12%

NPV and W A CC


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A nalys is and A dv ice on Project(s)

Net Present Va lue is the d ifference between the present va lue of the inf lows of cash and

present va lue of cash outf lows. NPV is used to ana lyse the prof itab ility of a project or an

investment.

Moreover, net present va lue can a lso be ca lculated us ing tab les, and spread sheets such as

Microsoft Exce l.

On the bas is of the illustrat ions in ana lysis in th is report ear lier and a lso the resu ltant

NPVswe can draw conc lusions w ith regards to poss i ble or most benef icial route in terms of

this project. Here I wou ld like to stress upon a fact that NPV is the most important factor

when it comes to mak ing a dec ision w ith regards to f inanc ial matters as it cons iders a lmost a ll

the e lements on wh ich success of the project depends.

Cons ider ing the NPVs generated by each project ana lysis it is qu ite c lear that Power Up p lc

shou ld take the Gas Powered Plant as it the best opt ion ava ilab le to rep lace the ex isting

system. It demonstrates that it will give organ isat ion susta ined return at good rate.


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Project Evaluat ion

I RR- I nternal Rate of Return

IRR is someth ing wh ich is s imilar to the net present va lue ca lculation. The NPV ca lculation

f inds the net present va lue us ing a predef ined d iscount rate. I RR f inds the d iscount rate that

makes the NPV equa l to zero. We can accept the opt ion wh ich g ives max imum I RR to the

project. The dec ision for th is project can a lso be accepted if the I RR is h igher than the

discount rate or the cost of borrow ing. In the case of f inanc ing projects the dec ision cr iter ia

is oppos ite to that of the invest ing projects, accept the f inanc ing project if the I RR is less than

the d iscount rate or cost of borrow ing.

IRR Gas Powered Stat ion 25.20%

IRR Nuclear Powered Stat ion 12.83%

IRR R enewab le Powered Stat ion 11.15%

IRR was ca lculated us ing the f inanc ial calculator and it is ev ident from the resu lts that Gas

Powered Station generates the best I RR and is hence backs the initial recommendat ion.

PBP- Payback Per iod

Payback per iod is the t ime requ ired for cumu lative incom ing returns to equa l the cumu lative

costs of an investment and usua lly measured in years. The investment w ith the shorter

payback per iod is cons idered the better investment. A shorter payback per iod is v iewed as

less r isky. For th is reason, payback per iod is often used as a measure of r isk, or a r isk -related

cr iter ion that must be met before funds are spent.


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Gas Powered Stat ion 6.2 Years

Nuclear Powered Stat ion 7.1 Years

R enewab le Powered Stat ion 8.4 Years

PBP a lso t icks another box in recommend ing the Gas Powered Station opt ion as the best

ava ilab le.

P I -Prof i tab i li ty I ndex

Prof itab ility Index measures the re lat ion between future wea lth and the amount invested and

measures the wea lth created by every invested. If PI < 1 then the project is prof itab le. It is

very usefu l for the compar ison of projected w ith d ifferent durat ions.

Gas Powered Stat ion 3.1

Nuclear Powered Stat ion 0.3

R enewab le Powered Stat ion 0.3

PI a lso conf irms that Gas Powered Station is the route to fo llow for Power Up P lc.


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D iscount Rate A nalys is

Net present va lues are very usefu l gauge to eva luate the effect iveness and benef its a project

will be ab le to produce however we cannot say that th is is a process wh ich is free of any

frailties. The b iggest d isadvantage to the ca lculation of NPV can be its sens itivity to d iscount

rates . NPV ca lculat ions are on ly resu ltant of both pos itive and negat ive cash f lows into the

present va lue. The d iscount rate used is the important & dec isive factor what the f ina l NPV

will be and a t iny increase or decrease in the d iscount rate w ill have a cons iderab le effect on

the f inal output. Otherw isewe can a lso use the Risk free rate.

NPV us ing d ifferent decomm issioning costs:

Clean up Cost @ 300 M 1,141.84 M

Clean up Cost @ 700 M 1,118.55 M

Even after tak ing into account lowest decomm issioning cost of 300 M the Gas powered

stat ion has the h ighest NPV thus recommended. However if th is opt ion is abandoned then it

will become rea lly d iff icult to po int out wh ich opt ion to choose ( R enewab le powered

stat ions NPV 1,141.31 M). So it w ill be inconc lusive to de icide.


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S upplementary I nformat ion

There are some other factors wh ich board needs to take into account as they m ight he l p in

mak ing dec isions and can a lso ass ist in mak ing the correct dec ision are as fo llows:

S oc io-Pol it ical I ssues

The likelihood of government, NG Os and Human Rights Organ isat ions oppos ing the project

like nuc lear p lant are requ ired to be taken into cons iderat ion before dec ision is f ina lised. Th is

informat ion can be co llected from conduct ing research on countr ies or industr ies wh ich have

already exper ienced the same scenar io or survey can a lso be conducted to gather re levant

informat ion.

Non-F i nanc ial R isk A nalys is

Non-Financ ial r isks can be descr i bed as some sort of techn ica l fau lt wh ich m ight resu lt in

explosion or gas om iss ion from the p lant and can resu lt in danger to living spec ies. To gather

informat ion on th is h istor ic data can be ana lysed.

Techn ical I nformat ion

Delay in construct ion, Safety measures and evo lving techno logica l issues can change the

scenar io very qu ick ly and its pretty hard to pred ict these in advance and Project manager

along w ith industry experts can form a team to research in terms of these.

Econom ic I nformat ion

With current state of wor ld econom ies and in part icular Europe econom ies it is pretty tough

to pred ict on a great sca le but poss i ble increase in demand is expected due to governments

reso lve to promote the industry.


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Cr i t ical Reflect ion on Learn i ng Outcomes

A person w ith not so much exper ience of report preparat ion and espec ially in terms of a

report wh ich be longs to Corporate F inance, I have exper ienced the importance of f inanc ial

and stat istical informat ion is extreme ly important wh ile dec iding and in part icular ly when the

projects are long term and have bear ing on mak ing or break ing of a lot of th ings wh ich can be

direct ly or indirect ly re lated to an organ isat ions goa ls. Prev ious ly I wou ld not have

cons idered the importance of ana lysing the f inanc ial data or the f inanc ial implicat ions that a

project m ight br ing a long w ith it. It a lso g ives me look ing at opt ions wh ile we ighing them

from another po int of v iew wh ich prev ious ly m ight not have been a very inf luent ial for me

but now I have understood that it I extreme ly important to have a thorough work ing on th is

aspect before the dec isions are f ina lized.

I had to work hard on each stage of research and there were stages where I found go ing

gett ing tough for me but I turned to my fr iends and those w ith past exper ience for gu idance

and d iscuss ion. I a lso referred to any source wh ich cou ld he l p me to f ind a way in direct ion of

a better research and ana lysis.

I a lso got to know that for rea l research cannot be done by us ing internet on ly instead you

have to show some effort in gather ing the requ ired informat ion and a lso that I needed to

understand the top ic f irst and a lso the expected outcomes of the quest ions be ing asked. I a lso

came to understand that I need to eva luate my project t imeline more accurate lywith hav ing

some buffer t ime for rev iew and for any last m inute h iccups. In broader terms, I learnt to do

research effect ively and successfu lly.

Initially I m isinterpreted and m ixed-up some parts of the ana lysis wh ich upon a rev iew was

correct ly before the f inal draft was furn ished. I was ab le to comb ine learn ing and techn iques

of corporate f inance w ith bus iness ana lysis and techn iques a long w ith adjud icat ing the scope


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of the top ic and what needs to be addressed. The object ive of the report was

eff icient lyconversed by usage of stat istical/f inanc ial cash f lows or charts and tab les us ing MS

Exce l & MS Word and th is a lso resu lted contr i but ion to overa ll learn ing and groom ing.

Overa ll, th is report was a learn ing and fu ll of exp lorat ion exper ience wh ich is tota lly d ifferent

to the informat ion we can extract from the books and journa ls. I be lieve that I can assess,

ana lyse and judge d ifferent investment methods in a more organ ised and eff icient manner.


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pg. 18

Reference

Richard A. Brea ley, Stewart C. Myers, Frank lin A llen

Pr inci ples of Corporate F inance (Internat iona l Edition).

Mc Graw -Hill: 2008.

Power Up PLC - Financial Decision Making

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