Acknowledgement

We would like to express our sincere gratitude and appreciation to Professor Amrit

Man Nakarmi for giving us an opportunity to do project work on financial and

economical analysis of a project.

We studied feasibility study of different MHP project collected in Pulchowk campus

library that helped us understand the purpose of financial and economic analysis and

interpret result more clearly. Thanks goes to reference section of library for providing

full access to us.

We would like to thank Mr Nawaraj Bhattrai, Deputy Director of Center for energy

studies, for providing us related information regarding the current situation of MHP.

On the basis of information provided by him we were able to perform the study.

1

Executive Summary

From the study of different MHP report it is easily understood that one of the major

problem among other is the running of MHP under low load factor.

In this small project work study of the effect of plant load factor was done and its

impact on economic and financial parameters was analyzed. For case study we have

used hypothetical data but it is similar one to that of a typical micro hydropower plant.

. Initially a MHP running with a low plant factor of only 0.25 is assumed. At this low

plant factor it has ENPV for life of 15 years is calculated as Rs 34601. EIRR is

10.08%. Benefit/cost ratio is 1.01. Again for a good design plant factor is assumed to

be above 0.4 initial year and above 0.6 in later years. For study purpose financial and

economic analysis was done assuming initial plant factor is 0.4 and it increases 4%

per annum.

2

Table of ContentsINTRODUCTION........................................................................................................5

1.1 Introduction..........................................................................................................51.2 Objectives.............................................................................................................51.3 Methodology........................................................................................................6

Hypothetical MHP.......................................................................................................72.1 Hypothetical Technical details.............................................................................72.2 Major components of Micro Hydro.....................................................................72.3Financial and economical analysis of MH project................................................7

FINANCIAL ANALYSIS............................................................................................93.1 Net Present Worth (NPW) Criterion....................................................................93.2Annual Equivalent...............................................................................................103.3Internal Rate of Return (IRR)..............................................................................103.4Unit energy cost..................................................................................................103.5Benefit Cost ratio................................................................................................103.6Subsidy policy of AEPC in MHP........................................................................113.7Assumptions for economic and financial analysis..............................................11

RESULT......................................................................................................................124.1 Total revenue......................................................................................................124.2 Annual cost.........................................................................................................124.3 Financial analysis without subsidy.....................................................................134.4 Financial analysis with subsidy..........................................................................144.5 Economic benefit................................................................................................154.6 Economic analysis without subsidy...................................................................164.7 Economic Analysis with subsidy.......................................................................174.8 Unit cost calculation...........................................................................................18

CONCLUSIONS AND RECOMMENDATION.....................................................205.1 Conclusions........................................................................................................205.2 Recommendations..............................................................................................20

References....................................................................................................................21

3

CHAPTER ONE

INTRODUCTION

1.1 Introduction

In Nepal, there is large potential of electricity from Micro hydro. Although there is

large potential, demand of electricity is low in rural areas. In rural areas electricity is

used mainly for lighting in evenings and night. There are possibilities for end use but

not in operation in many areas. The end use application can made Micro Hydro

Projects financially and economically viable.

In this project work, financial and economical analysis of a hypothetical MHP is done

by considering a plant factor of 0.25 only. The project is financially infeasible. Taking

economic benefits from saving of dry cell batteries for electric appliances and

kerosene for lighting, heating and cooking only make the project feasible.

A good design will aim for a predicted plant factors of above 0.4 even in the first

years after installation and above 0.6 in later years. (Harvey, 1993) In this small

project work, financial and economic analysis was done assuming initial plant factor

is 0.4 (it means demand is 40% of total capacity) and it increases 4% per annum. The

analysis was done based on these assumptions.

1.2 Objectives

Main objective is

To perform financial and economic analysis of a typical MHP taking plant

factor of 0.4 in starting year and demand in increasing trend of 4% per annum

Specific objectives are

To perform financial and economical analysis with and without subsidy

To find unit cost with and without subsidy

To compare calculated analysis with initial conditions having only plant factor

0.25

4

To study effect on financial and economic analysis due to plant load factor

1.3 Methodology

The following method was used for analysis

Literature review of few Micro Hydro and economic analysis were done.

All costs are assumed to increase by different inflation factors. As the analysis

was done for present inflation of 5 years was taken approximately.

Financial and economic analysis was done with subsidy and without subsidy.

Unit cost was also calculated.

The results were compared.

On basis of results conclusions were drawn.

5

CHAPTER TWO

Hypothetical MHP

2.1 Hypothetical Technical details

Installed capacity 24kW

Design flow 82 lps

Gross Head 58.50m

Turbine type Pelton

2.2 Major components of Micro Hydro

The following are the major components of Micro hydro

a) Diversion weir

b) Headrace canal

c) Desilting basin

d) Forebay

e) Penstock pipe

f) Powerhouse building

g) Turbine

h) Generator

i) Transmission line

2.3Financial and economical analysis of MH project

At low plant load factor of 0.25 the project is infeasible. When taking economic

considerations, like from saving of dry cell batteries for electric appliances and

kerosene for lighting, heating and cooking the project is found to be feasible.

At discount rate of 10%,

ENPV for life of 15 years was Rs 34601.

Benefit/cost ratio was 1.01.

Economic Internal rate of Return was 10.08%.

6

Unit energy cost =Rs 7.52

ENPV and B/C ratio both were low. EIRR was slightly high than MARR. This

showed that even project seemed economically viable it might be infeasible if some

parameters of cost is increased. Risk analysis was not done.

7

CHAPTER THREE

FINANCIAL ANALYSIS

3.1 Net Present Worth (NPW) Criterion

Net Present Worth is simply the Present Value of all revenues minus Present values of

all running and capital costs. As the costs and benefits of a project are spread over the

useful years of project life, they need to be discounted so that all values could be

compared to the value of a single year. The discounted net cash flow will provide a

widely used criterion for measuring the profitability of a project. For this purpose, all

future values are discounted to make them equivalent to the present value and is

expressed as Net Present worth (NPW) or Net Present Value (NPV) which determines

whether or not the project is an acceptable investment.

The basic procedures for applying the present worth criterion to a typical investment

project are (Park, 2002)

Determine the interest rate that the firm wishes to earn in its investments. This

interest rate is called as Minimum Attractive Rate of Return (MARR).

Estimate the service life of the project.

Estimate the cash inflow for each period over the service life,

Estimate the cash outflow over each service period.

Determine the net cash flows

Find the present worth of each net cash flow at the MARR. Add up these

present worth figures, their sum is defined as the project’s NPW.

PW (i) = ∑An/ (1+i) n

Where PW (i) = NPW calculated at i

An= Net cash flow at the end of period n

i=MARR

n= Project life

A positive NPW means that the equivalent worth of the inflow is greater than

the equivalent worth of the outflows. This means the project makes a profit.

If PW (i)>0, accept the investment.

If PW (i) =0, remain indifferent

8

If PW (i) <0, reject the investment.

3.2Annual Equivalent

Annual equivalent worth (AE) criterion provides a basis for measuring investment

worth by determining equal payments on an annual basis. Knowing that net present

worth, annual equivalent can be calculated by multiplying amount by the capital

recovery factor.

If AE (i)>0, accept the investment.

If AE (i) =0, remain indifferent

If AE (i) <0, reject the investment.

3.3Internal Rate of Return (IRR)

Internal Rate of Return (IRR) is defined as the discount rate which makes the NPW of

the project equal to zero. In other words, IRR is that discount rate which makes the

discounted benefits of the project equal to its discounted costs. The decision rule for

the simple project is as follows:

If IRR>MARR, accept the project.

If IRR=MARR, remain indifferent

If IRR<MARR, reject the project

3.4Unit energy cost

The unit of electrical energy is kWh. Unit energy cost is calculated by

Unit energy cost = (Total annual cost)/ (energy consumed usefully in a year)

3.5Benefit Cost ratio

For a benefit cost profile, let B and C be present values of benefits and costs.

B=∑bn (1+i)-n

C=∑cn (1+i)-n

B/C ratio= B/C

9

If B/C (i)>1, accept the investment.

If B/C (i) =1, remain indifferent

If B/C (i) <1, reject the investment.

3.6Subsidy policy of AEPC in MHP

The subsidy for MHP projects/schemes is as follows:

 A subsidy amount of NPR 10,000 per household will be provided for new MHP

project from above 5 kW to 500 kW. But the subsidy will not be more than NPR

85,000 per installed kW.

3.7Assumptions for economic and financial analysis

Some assumptions taken for economic and financial analysis are

The project life is taken for 15 years.

Three staffs one manager and two operators are sufficient to manage plant.

The salary of manager is Rs 5000/month and increases Rs 250/month in a

year. The operators salary is Rs 3500/month and increases Rs 200/month in

every year.

Initial office expense is about Rs 5000/year and miscellaneous cost is Rs

4000/year. These costs increase 4% in a year.

Replacement cost for wooden poles occur each 5 years. The price increases by

5% in next period.

Operation and maintenance cost remains constant which is 2% of the initial

investment.

Current energy demand is 40% of total capacity. Plant factor is 0.4.

The demand goes on increasing 4% per annum on average.

The selling price of electricity per unit is Rs 5.

In economic benefit calculation only substitution of kerosene and dry cell

batteries are taken. Their prices are assumed to be constant in fifteen years for

simplicity.

10

CHAPTER FOUR

RESULT

4.1 Total revenue

For total revenue, cost of 1 kWh is taken as Rs 5.Initially plant factor is taken as 0.4.

Initially demand is taken as 84096 units. The demand is assumed to increase 4% per

annum.

Year

Energy demand (in kWh)

Revenue (in Rs)

0    1 84096 4204802 87460 4372993 90958 4547914 94597 4729835 98380 4919026 102316 5115787 106408 5320418 110665 5533239 115091 575456

10 119695 59847411 124483 62241312 129462 64731013 134640 67320214 140026 70013015 145627 728135

4.2 Annual cost

For calculation purpose, it is classified into salary, office expenses, miscellaneous and

operating and maintenance cost. In staffs, two operators and one manager is taken.

Office expenses and miscellaneous expenses are assumed to be increased by 4% per

annum due to inflation.

Year Manageroperator 1

operator 2

Total salary

Office expenses

Miscellaneous

Operation and Maintainence cost

Replacement cost

Total Annual cost (in Rs)

0                  1 60000 42000 42000 144000 5000 4000 72726   2257262 63000 44400 44400 151800 5200 4160 72726   233886

11

3 66000 46800 46800 159600 5408 4326 72726   2420604 69000 49200 49200 167400 5624 4499 72726   2502505 72000 51600 51600 175200 5849 4679 72726 23520 2819756 75000 54000 54000 183000 6083 4867 72726   2666767 78000 56400 56400 190800 6327 5061 72726   2749148 81000 58800 58800 198600 6580 5264 72726   2831699 84000 61200 61200 206400 6843 5474 72726   291443

10 87000 63600 63600 214200 7117 5693 72726 24696 32443211 90000 66000 66000 222000 7401 5921 72726   30804812 93000 68400 68400 229800 7697 6158 72726   31638113 96000 70800 70800 237600 8005 6404 72726   32473514 99000 73200 73200 245400 8325 6660 72726   33311215 102000 75600 75600 253200 8658 6927 72726 25931 367442

4.3 Financial analysis without subsidy

For financial analysis, the project life is taken as 15 years. Initial investment is taken

as Rs 3636300. For inflation rate of 3% is taken. Interest rate is taken as 10%.

YearTotal revenue

Total cost Depreciation

Net profit

Net cash flow (Rs)

0   3636300     -36363001 420480 225726 242420 -47666 1947542 437299 233886 242420 -39007 2034133 454791 242060 242420 -29689 2127314 472983 250250 242420 -19687 2227335 491902 281975 242420 -32493 2099276 511578 266676 242420 2482 2449027 532041 274914 242420 14707 2571278 553323 283169 242420 27734 2701549 575456 291443 242420 41593 284013

10 598474 324432 242420 31622 27404211 622413 308048 242420 71945 31436512 647310 316381 242420 88509 33092913 673202 324735 242420 106047 34846714 700130 333112 242420 124598 36701815 728135 367442 242420 118273 360693

NPV of cash flows from year 1 to 10 Rs1,909,346.02 NPV (Rs1,726,953.98)AE (10%) (Rs227,049.16)

IRR 1.365%

The cash flow diagram is shown below

12

Net cash flow without subsidy (Rs)

-4000000

-3500000

-3000000

-2500000

-2000000

-1500000

-1000000

-500000

0

500000

1000000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Year

NPV value is negative. This shows project is financially infeasible. IRR is very low.

The project is not self-sustaining.

4.4 Financial analysis with subsidy

Subsidy is calculated according to AEPC subsidy policy.

YearTotal revenue

Total cost Depreciation

Net profit Net cash flow (Rs)

0   1596300     -15963001 420480 225726 106420 88334 1947542 437299 233886 106420 96993 2034133 454791 242060 106420 106311 2127314 472983 250250 106420 116313 2227335 491902 281975 106420 103507 2099276 511578 266676 106420 138482 2449027 532041 274914 106420 150707 2571278 553323 283169 106420 163734 2701549 575456 291443 106420 177593 284013

10 598474 324432 106420 167622 27404211 622413 308048 106420 207945 31436512 647310 316381 106420 224509 33092913 673202 324735 106420 242047 34846714 700130 333112 106420 260598 36701815 728135 367442 106420 254273 360693

13

NPV of cash flows from year 1 to 10 Rs1,909,346.02 NPV Rs313,046.02 AE (10%) Rs41,157.34

IRR 12.899%

The cash flow diagram is shown below

Net cash flow with subsidy (Rs)

-2000000

-1500000

-1000000

-500000

0

500000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

With subsidy. NPV is Rs 313,046.02. AE is Rs 41,157.34 This means project generates Rs 41,157.34 annually. IRR is 12.889%. It means on investment it generates interest of 12.889%. As this is social project, the project interest rate is not low for investment.

4.5 Economic benefit

For economic analysis saving of kerosene and dry cell batteries are only taken. Other

immeasurable benefits due to Micro Hydro like increase in productive hours of

students, awareness generated by information in TV, radio, improvement in life style

are not calculated.

kerosene (l) dry cell (pair)

YearQuantity saved Price

Quantity saved Price

Total Annual cost (in Rs)

0          1 6194 73 8532 25 6654622 6194 73 8532 25 6654623 6194 73 8532 25 6654624 6194 73 8532 25 6654625 6194 73 8532 25 665462

14

6 6194 73 8532 25 6654627 6194 73 8532 25 6654628 6194 73 8532 25 6654629 6194 73 8532 25 665462

10 6194 73 8532 25 66546211 6194 73 8532 25 66546212 6194 73 8532 25 66546213 6194 73 8532 25 66546214 6194 73 8532 25 66546215 6194 73 8532 25 665462

4.6 Economic analysis without subsidy

YearTotal revenue

Total cost Depreciation

Net profit Benefit

Net cash flow (Rs)

0   3636300       -36363001 420480 225726 242420 -47666 665462 8602502 437299 233886 242420 -39007 665462 8689093 454791 242060 242420 -29689 665462 8782274 472983 250250 242420 -19687 665462 8882295 491902 281975 242420 -32493 665462 8754236 511578 266676 242420 2482 665462 9103987 532041 274914 242420 14707 665462 9226238 553323 283169 242420 27734 665462 9356509 575456 291443 242420 41593 665462 949509

10 598474 324432 242420 31622 665462 93953811 622413 308048 242420 71945 665462 97986112 647310 316381 242420 88509 665462 99642513 673202 324735 242420 106047 665462 101396314 700130 333112 242420 124598 665462 103251415 728135 367442 242420 118273 665462 1026189

NPV of cash flows from year 1 to 10 Rs6,971,161.51 ENPV Rs3,334,861.51 AE (10%) Rs438,446.84

EIRR 23.616%

Total cost 5713584Total benefit 9048446

B/C ratio 1.58

15

Economic Net cash flow without subsidy (Rs)

-4000000

-3000000

-2000000

-1000000

0

1000000

2000000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Year

Economic analysis without subsidy is good. ENPV is Rs 3,334,861.51 AE is Rs

438,446.84. EIRR is 23.616%. B/C ratio is 1.58. This means that benefits exceeds

cost than 1.58 times.

4.7 Economic Analysis with subsidy

YearTotal revenue

Total cost Depreciation

Net profit benefits

Net cash flow (Rs)

0   1596300       -15963001 420480 225726 106420 88334 665496 8602502 437299 233886 106420 96993 665496 8689093 454791 242060 106420 106311 665496 8782274 472983 250250 106420 116313 665496 8882295 491902 281975 106420 103507 665496 8754236 511578 266676 106420 138482 665496 9103987 532041 274914 106420 150707 665496 9226238 553323 283169 106420 163734 665496 9356509 575456 291443 106420 177593 665496 949509

10 598474 324432 106420 167622 665496 93953811 622413 308048 106420 207945 665496 97986112 647310 316381 106420 224509 665496 99642513 673202 324735 106420 242047 665496 101396314 700130 333112 106420 260598 665496 103251415 728135 367442 106420 254273 665496 1026189

NPV of cash flows from year 1 to 10 $6,971,161.51

16

ENPV $5,374,861.51 AE (10%) $706,653.34

EIRR 54.826%

Total cost 3673584Total benefit 9048446

B/C ratio 2.46

Economic Net cash flow with subsidy (Rs)

-2000000

-1500000

-1000000

-500000

0

500000

1000000

1500000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Year

Economic analysis with subsidy is good. ENPV is Rs 5,374,861.51 AE is Rs

706,653.34 EIRR is 54.826%. B/C ratio is 2.46. This means that benefits exceeds cost

than 2.46 times.

4.8 Unit cost calculation Unit cost 1 €

Year

Energy demand (in kWh)

annual cost

Total Annual cost (in Rs) with subsidy

Total annual cost (in Rs) without subsidy

0     1596300 36363001 84096 84,096 € 225726 2257262 87460 87,460 € 233886 2338863 90958 90,958 € 242060 2420604 94597 94,597 € 250250 250250

17

5 98380 98,380 € 281975 2819756 102316 102,316 € 266676 2666767 106408 106,408 € 274914 2749148 110665 110,665 € 283169 2831699 115091 115,091 € 291443 291443

10 119695 119,695 € 324432 32443211 124483 124,483 € 308048 30804812 129462 129,462 € 316381 31638113 134640 134,640 € 324735 32473514 140026 140,026 € 333112 33311215 145627 145,627 € 367442 367442

Total operating cost 2,077,284Initial Investment with subsidy 1,596,300Total cost 3,673,584

Total operating cost 2,077,284Initial Investment without subsidy 3,636,300Total cost 5,713,584

Total cost 797326.01€

Unit cost with subsidy 4.61Unit cost without subsidy 7.17

Unit cost with subsidy is Rs 4.61. Unit cost without subsidy is Rs 7.17. With subsidy

it is less than selling price per unit. Without subsidy, it is little high. Without subsidy

also unit cost is less than that of Nepal Electricity Authority.

18

CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATION5.1 Conclusions

By doing this project we got knowledge about financial analysis of any project in

general .Especially in case of MHP just installing is not enough but its load factor

must be adequate .In many situation local people have to be provided training on

small entrepreneurship and skill development so that income generating activities

increase resulting increase in energy consumption and thus load factor. Finally while

thinking of any energy projects such points must be reckoned in mind.

5.2 Recommendations

End use applications in micro hydro increase revenues but total cost remains

same. It also reduces cost of electricity per unit.

While approaching to MHP in any locality economic generating activity

should (small entrepreneurship consuming electricity) also be encouraged so

that adequate plant load factor is obtained.

19

References

Park, C.S., 2002, Contemporary Engineering Economics, 3rd Edition, Prentice

Hall of India Pvt. Ltd., New Delhi, India ISBN: 81-203-2143-X.

Harvey, A., 1993, Microhydro Design, Intermediate Technology Publications,

United Kingdom

Kandel, K., 2005, “Economic and Financial Analysis of Micro Hydropower

Projects A case study of Gaundi Khola MHDS I Dudilabhati VDC, Baglung”,

M. B.S. Thesis, Tribhuvan University, Nepal.

http://www.aepcnepal.org

20