EFB210 Finance 1, Semester 1: Capital Budgeting Report and Analysis

This report provides a capital budgeting analysis for Deep Pocket Fund, evaluating two solar energy investment opportunities: a rotating solar panel system and a fixed solar panel system. The analysis, based on a 30-year project life, uses a 9% discount rate and considers factors like land appreciation, taxation, depreciation, and government incentives. The methodology includes calculating plant production, revenue, costs, depreciation, and free cash flow to determine the Net Present Value (NPV) of each project. The report recommends investing in the rotating solar system, which shows a positive NPV of $918,352, compared to the fixed solar system's negative NPV of -$5,857,473. The analysis highlights the importance of data and estimations, and notes the limitations of the analysis, which does not include qualitative factors.

Contents
Capital Budget Reporting and Analysis..................................................................................................2
Summary...........................................................................................................................................2
Assumptions......................................................................................................................................2
Analysis and Methodology................................................................................................................2
Recommendation and Limitations.....................................................................................................3

Finance 1
Capital Budget Reporting and Analysis
Summary
The report has been written with a view to analyse the feasibility of two probable business
opportunities for Deep Pocket Fund. The project involves huge outflow of funds outright and
has a long life period of thirty years. The two business opportunities are:
(a) Investing in rotating solar panel of 25MWH capacity;
(b) Investing in fixed solar panel system of 30 MWH capacity.
Assumptions
The assumptions underlying the computation has been detailed here-in-below:
(a) Discount rate for the project future cash flows has been taken at 9%
(b) Capital gain on the appreciated value of land has been taxed at 15% after considering
15% normal discount;
(c) 30% tax rate has been applied on ordinary income;
(d) Depreciation has been charged over the period of thirty years under straight line method
with residual value;
(e) The efficiency of rotating solar panel has been taken at 5.6 MW per hour and the output
of fixed solar panel has been taken at 4.5 Megawatt per Hour.
Analysis and Methodology
On the basis of above assumptions, cash flows of both the business opportunities have been
computed by using the following method:
(a) Plant Production has been computed for each plant considering 365 days a year;
(b) Plant Revenue rate has been computed by taking increase in sale price of 2 $ per three
year;
(c) 5 years of government incentive has been computed;
(d) Cost has been considered on the actual sales value without considering the government
incentive;
(e) Depreciation has been computed by dividing the cost of plant over the period of thirty
years and the tax shield on depreciation has been considered for evaluating the project;
(f) Tax has been levied on the profit of the venture at 30% and 15% on the resulting capital
gain on land;
(g) Post above, depreciation initially deducted has been added back to compute the free cash
flow for the project;
(h) Further, discounting rate @ 9% has been applied to determine the present cash value of
the project.
(i) All the present value of inflows and outflows have been totalled to determine the net
present value of the project.

Recommendation and Limitations
On the basis of above analysis, the net present value of the project has been determined for
the project. The Net Present Value is a financial analysis tool used for determining the
present value of inflows and outflows of a proposed business opportunity. If the present value
of inflows exceed the present value of outflow the project is feasible and shall be carried out.
Similarly, if the present value of outflow exceed the present value of inflow, project shall not
be carried out and shall be dropped.
The Net Present Value of Rotating Solar System has been positive and determined at
$918,352 and the Net Present Value of the Fixed Solar System has been negative and
determined at -$ 5,857,473.
On the basis of above, a view may be taken that the project of Rotating Solar System shall be
undertaken as it is more feasible compared to fixed solar system. Further, the above views are
presented based on data and estimation and does not include qualitative analysis. In addition,
the view may differ if the data and estimation change and fixed solar system might become
feasible.