AGL Energy Limited: Investment Appraisal for Solar Energy Machinery

Assignment 1: Applied Project
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Table of Contents
1. Introduction............................................................................................................................3
1.1: Project background............................................................................................................3
1.2: Objectives of project.........................................................................................................4
1.3: Assumptions, Constraints and Risk..................................................................................4
2. Literature Review:.....................................................................................................................6
2.1 Overview of Project Economical Analysis Techniques and Tools..................................6
2.1.1: Equivalent Uniform Annual Cash Flow....................................................................6
2.1.2: Present worth (Net Present Value)............................................................................8
2.1.3: Internal Rate of Return............................................................................................10
2.1.4: Modified IRR.............................................................................................................11
2.1.5: Cost-Benefit Analysis................................................................................................12
2.2 Other Decision Making Models - Multi-Attribute Decision-Making Model................14
2.2.1: MCDM in Financial Decision Making for Projects...............................................14
2.2.2: MADM (Multiple Attributed decision making).....................................................15
2.2.3: Analytical Hierarchy Process (AHP).......................................................................16
2.2.4 Best Practices for Business Growth.....................................................................17
2.2.5: Business Growth Strategies......................................................................................18
2.2.6: Profitability Index.....................................................................................................20
3. Cash flows and outflows of the case project..........................................................................21
4. Recommendations for case project........................................................................................22
5. Sensitivity analysis...................................................................................................................23
6. Other non-financial decision making factors........................................................................24
7. Conclusion................................................................................................................................26
References:...................................................................................................................................27
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1. Introduction:
The report helps the users in developing the knowledge about various techniques available for
economic analysis while considering the economic performance of a business organization. The
use of these techniques will help ten organization in assessing the profitability and adequacy of
funding operating along with the allocation of various resources in an organization.
1.1: Project background:
The company AGL energy limited in an integrated energy resource company which is engaged
in providing gas, electricity and related products along with the various services to its customers.
The operations of the company are extending to retail and wholesale marketing in Australia. The
company utilizes various types of solar energy machines which are helpful in generating
electricity through thermal, natural gas and storage along with wind power generation plants.
The solar energy machines being used by the company has to be replaced in about 5 years and
this has been a major issue of capital budgeting decision for the management of the company
(Creemers, 2017).
Analysing the current investment available for the company, there are two options one of which
sin associated with purchasing the machine from the supplier of Germany and the machine name
is Frosto solar machine and the other option is concerned with purchasing the machine from
North Asia region in which Agentica solar plant machine will be purchased. Both of these
investment options has their cash flows as described below:
Project A Project B
Particulars Amount AUD Amount AUD
Income Year 1 350000 400000
Income Year 2 250000 360000
Income Year 3 230000 320000
Income Year 4 200000 305000
Income Year 5 180000 300000
Income Year 6 170000 280000
Income Year 7 160000 150000
Total Incomes 1540000 2115000
Investment at Initial Level 1000000 1400000
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The discount rate has been considered to be 12% in both the cases while considering the market
interest rate and the risk prevailing in the economy.
1.2: Objectives of project:
The objective of the report is to manage the funds available in the company and making
appropriate investment choice while considering the current situation of the company and
assessing profitability options. The other objectives are associated with:
Obtaining cost advantage The following report and investment appraisal
techniques will help the management in
reducing the cost associated with energy
generation. The manual labour of the
company will be controlled in anyways
(Kamau & McCormick, 2015).
Improving the quality of operations The use of machines and replacement cost
will enhance the working condition and
operational performance of machinery.
Enhancing the efficiency The adoption of new innovative and advanced
technology in machines will help the
company in conducting efficient business
operations and quality products will be
generated.
1.3: Assumptions, Constraints and Risk:
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The discount rate which has to be considered for considering the value of money has been 12%
for both the projects as the alternative investment plan will yield a return of 12% to the company.
The management has a perception that the machine will allow the company to conduct the more
productive operations and wastages can be minimized by generating higher returns for the
company. The operational performance of the machines does not require any high set of skilled
technical knowledge among the staff and this will allow for better operational productivity.
Variations between expected and actual:
The expected inflow can be subjected to certain types of market changes which can affect the
future profitability of the project. The various factors present in the micro as well as the macro
environment of the company will affect the future cash inflows and outflows concerned with the
project.
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2. Literature Review:
2.1 Overview of Project Economical Analysis Techniques and Tools
2.1.1: Equivalent Uniform Annual Cash Flow
Equivalent Uniform Annual Cash Flow
Project A Project B
Particulars Inflow NPV Factor Present
Value $
Inflow NPV Factor Present
Value $
Income
Year 1
350000 0.892857143 312500 400000 0.89285714
3
357142.8571
Income
Year 2
250000 0.797193878 199298.4694 360000 0.79719387
8
286989.7959
Income
Year 3
230000 0.711780248 163709.457 320000 0.71178024
8
227769.6793
Income
Year 4
200000 0.635518078 127103.6157 305000 0.63551807
8
193833.0139
Income
Year 5
180000 0.567426856 102136.834 300000 0.56742685
6
170228.0567
Income
Year 6
170000 0.506631121 86127.2906 280000 0.50663112
1
141856.7139
Income
Year 7
160000 0.452349215 72375.87445 150000 0.45234921
5
67852.3823
Total
Income
1063251.541 1445672.499
EUAC
Formula
Present value of Incomes/Number of
years
Present value of Incomes/Number of
years
EUAC 151893.0773 206524.6427
EUAC is an investment appraisal technique of capital budgeting system which is used by the
investment decision-makers to compare the appropriateness of two or more projects. In the case
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