Finance Report: Analyzing Power Generation Options with NPV Analysis

This finance report presents an NPV analysis comparing two power generation options: the Business as Usual (BAU) plan and the Emission Intensity Scheme (EIS). The methodology employs NPV analysis to determine future cash flows and net benefits, assuming a constant cost of capital of 10%. The results indicate that the EIS option is the more favorable choice, with a positive NPV of $6,843,22,254, contrasting with the negative NPV of the BAU option (-$121,77,162). Breakeven analysis further supports the EIS option. Limitations include the assumption of a constant cost of capital and the exclusion of external factors affecting cash inflows.

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Finance
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Author’s Note:

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Executive Summary
The main purpose of this analysis is to analyze the options which are available to Senator
regarding effective alternatives for the coal fired power stations. The senator has two option
which as Business as Usual Plan and Emission Intensity Scheme. The plan is to conduct is NPV
analysis so as to choose the best possible options.

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Table of Contents
Methodology....................................................................................................................................3
Results..............................................................................................................................................3
Limitation........................................................................................................................................4
Reference.........................................................................................................................................5

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Methodology
The analysis of the two powers generation option which is available to the senator is to be
done on the basis of NPV analysis. NPV analysis refers to the techniques which is used in capital
budgeting which helps individuals to determine the future cash flows which can be generated
from a project1. The calculation of NPV analysis considers the initial investment costs which is
undertaken for the project and also the cost of capital which is used in the computation of NPV
analysis. For the purpose of computation of NPV of both BAU option and EIS system, the cost
of capital is assumed to be constant at 10%. NPV analysis will help the senator’s executive to
determine the future cash flows which the projects will be generating and also the net benefit of
the same on the basis of which the decision about selection is to be taken2.
Results
As per the analysis of the financial information which is shown in the NPV analysis, EIS
system offers the best possible solution as compared to BAU option. The senator should select
EIS option as the option shows that the NPV is positive as shown in the calculations. The NPV
of BAU option which is calculated is shown as $ 121,77,162 which is in negative which shows
that the cash outflow in such a case is more than the cash inflows which suggests that the option
is not appropriate from the point of view of profitability. In the case of EIS option, the NPV as
calculated is shown as $ 6843,22,254 which is in positive and much better than NPV of the BAU
option which suggest that the management should select such an option as it will be able to
1 Dietz, Simon, and Cameron Hepburn. "Benefit–cost analysis of non-marginal climate and energy projects." Energy
Economics 40 (2013): 61-71.
2 Chang, Chen-Yu. "A critical analysis of recent advances in the techniques for the evaluation of renewable energy
projects." International Journal of Project Management 31, no. 7 (2013): 1057-1067.

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generate cash inflows for future and also improve the profitability of the energy producing unit3.
The breakeven analysis also shows that the EIS option is much more favorable as compared to
BAU option. As per the breakeven analysis which is conducted on the financial information of
both the options. The breakeven analysis shows that Break even in MHW for BAU is shown to
be 3621816.668 and the Breakeven analysis in Dollars is shown to be $ 3078,54,417. The
breakeven in MHW is shown to be 3371679.104 for EIS option and the breakeven in dollars for
EIS option is $ 3024,73,332.
Limitation
The limitation which are associated with the NPV analysis which is conducted in case of
selecting the best option is that it assumes that the cost of capital remains constant throughout the
year4. Another limitation is that the cash inflows of a business also depends on other factors
which may be external in nature which are ignored in the analysis which is conducted and it is
assumed to follow ceteris paribus rule which establishes that every other factor remains constant.
3 Miorando, Rogério Feroldi, José Luis Duarte Ribeiro, and Marcelo Nogueira Cortimiglia. "An economic–
probabilistic model for risk analysis in technological innovation projects." Technovation 34, no. 8 (2014): 485-498.
4 Hann, Rebecca N., Maria Ogneva, and Oguzhan Ozbas. "Corporate diversification and the cost of capital." The
journal of finance 68, no. 5 (2013): 1961-1999.

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Reference
Chang, Chen-Yu. "A critical analysis of recent advances in the techniques for the evaluation of
renewable energy projects." International Journal of Project Management 31, no. 7 (2013):
1057-1067.
Dietz, Simon, and Cameron Hepburn. "Benefit–cost analysis of non-marginal climate and energy
projects." Energy Economics 40 (2013): 61-71.
Hann, Rebecca N., Maria Ogneva, and Oguzhan Ozbas. "Corporate diversification and the cost
of capital." The journal of finance 68, no. 5 (2013): 1961-1999.
Miorando, Rogério Feroldi, José Luis Duarte Ribeiro, and Marcelo Nogueira Cortimiglia. "An
economic–probabilistic model for risk analysis in technological innovation
projects." Technovation 34, no. 8 (2014): 485-498.

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