1

CONTENTS
1. Introduction ............................................................................................................................. 2
1.1. Company Structure ........................................................................................................... 3
2. Capital Structure Analysis ....................................................................................................... 3
3. Cost of Capital ......................................................................................................................... 4
3.1. Cost of equity .................................................................................................................... 4
3.2. Cost of debt ....................................................................................................................... 4
3.3. Cost of Capital .................................................................................................................. 4
4. Project Evaluation ................................................................................................................... 5
4.1. Project Introduction .......................................................................................................... 5
4.2. Revenues ........................................................................................................................... 5
4.3. Expenditures ..................................................................................................................... 6
4.4. Cost of Capital .................................................................................................................. 6
Capital cost .............................................................................................................................. 6
Weighted average cost of capital ............................................................................................. 7
4.5. Net Present Value Calculation .......................................................................................... 8
4.6. Payback Period Calculation .............................................................................................. 8
4.7. Internal Return Rate .......................................................................................................... 9
4.8. Project Evaluation ............................................................................................................. 9
References ....................................................................................................................................... 9
List of Figures
Figure 1.1: Company structure ........................................................................................................ 3
Figure 4.1: Revenue generation ....................................................................................................... 5
Figure 4.2: Royalty payment variations .......................................................................................... 6
List of Tables
Table 3.1: Return rates..................................................................................................................... 4
Table 4.1: Summarised detail of project .......................................................................................... 5
Table 4.2: Capital cost breakdown .................................................................................................. 7
2

1. INTRODUCTION
FLC hydropower PLC is a company which engages in many Green Sector businesses. Its
business portfolio ranges from plantation sector to power generation by renewable energy such as
hydro power. FLC hydropower PLC concerns mainly on fulfilling their responsibilities towards
environment while implementing sustainable development concepts.
It is a known fact that the energy demand is increasing every second in the present society and
fossil fuels which we relied on is deteriorating in even greater rate resulting an energy crisis. The
only alternative is to look forward to renewable energy sources. That has greatly influenced in
increasing the demand for companies such as FLC hydropower PLC.
When considering about hydropower plants, FLC hydropower PLC has given the priority to lands
which belongs to the group for exploring the potential of hydropower generation. In the year 2013,
FLC hydropower PLC has produced 1.6 MW each at Sanquhar and Delta plants. A loss of
Rs.11,626,602/- has been recorded for the year compared with a gross profit of Rs.11,129,032/- in
the previous year. The drought condition prevailed during the second quarter of 2013 and also the
reduction of tariff rate by 7% which is to be provided by Ceylon Electricity Board might have been
the reason for this.
FLC hydropower PLC is planning on investing two new mini hydro power plants during the second
half of the year 2014 in Pussellawa and Kuruwita which are having installed capacity of 1 MW
and 0.83 MW respectively. There are about 7 other mini hydropower plants scheduled to be started
once they have been given permission from Sustainable Energy Authority which altogether
produce 9.22 MW. The balance IPO funds allocated for these seven Hydro Power projects
amounting to Rs. 585.87 Mn as at 31
st
March 2013 have been invested in short term deposits and
the Group will continue such deposits until its intended utilization.







3

1.1. Company Structure

Figure 1.1: Company structure
Figure 1.1 illustrates the company structure and the respective persons names and their position in
the organization.
2. CAPITAL STRUCTURE ANALYSIS
Currently FLC hydropower PLC is having long term liabilities amounting to Rs 43,881,817 and
equity amounting to Rs 752,703,880. This leaves with 5.5 % of debt of total capital. But they
experienced a loss in the year ended 2013.
This capital structure gives firm the ability to obtain more loans, and the influence from the
financing institutes are less in this case. But, their interest cover is negative because of the losses
incurred during last year. This makes financing from the debt difficult. But then again, they were
experiencing profits on the year ended 2012. This loss could be one time thing, which will not
affect the relationship they have with banks leading them to take on more loans.
This capital structure can be improved by analysing interest cover for different gearing ratios
followed by identifying corresponding credit ratings and debt interest rates for those gearing ratios.
Finally cost of equity can also be analysed with different gearing ratios with the use of unlevered
beta and the corporate tax rates. Then cost of capital can be evaluated to find out the most optimum
capital structure which minimises the cost of capital. This is another way to improve the capital
structure of the firm.
Mr.K Aloysius
Chairman
Non executive director
Mr. G J
Aloysius
Executive director
Mr. I C
Nanayakkara
Executive director
Mr. J M S de
Mel
Executive director
Mr. Murali
Prakash
Executive director
Mr. P R
Saldin
Non executive director
Mr. G A Aloysius
Managing director/CEO
Executive director
4

3. COST OF CAPITAL
3.1. Cost of equity
Cost of equity calculation depends on the risk of the FLC hydro power. Cost of equity is calculated
with the use of beta (i.e. systematic risk) of the organisation. Market return for this calculation is
derived from calculating averaging ASPI return in the Colombo stock exchange during past 5
years. 5 year averaged Treasury bond rate is taken as the risk free rate which is listed in the Central
Bank of Sri Lanka.
Table 3.1: Return rates
Risk free rate (rf) 10.64 %
Market return rate (rm) 31.76 %
Beta 1.01
Therefore, cost of equity is,
r
e
= r
f
+(r
m
r
f
) = 10.64 + 1.01(31.76 10.64) = 31.97 %
3.2. Cost of debt
Cost of debt is calculated assuming this projects debt is financed by a firm with a deviation of 8%
from 6 months averaged weighted deposit rate (AWDR) which is obtained from website of Central
Bank of Sri Lanka. Therefore cost of debt is,
r
d
= AWDR +8% = 9.86 +8 = 17.86 %
3.3. Cost of Capital
Therefore the cost of capital of the firm is,
Cost of capital = r
d

D
D +E
+r
e

E
D +E
= 17.86% 5.5%+31.97% 94.5% = 31.19%
Cost of capital of this firm is high because this has a systematic risk greater than the market risk.
Therefore raising more equity would again increase the cost of capital because investors will
require more return. This is because they will expect the systematic risk rise because of the
volatility currently present in the stocks.
It is advised to raise more debt than equity for future financing activities to keep reduce the cost
of capital.
5

4. PROJECT EVALUATION
4.1. Project Introduction
FLC Hydro power PLC is going to undertake a mini hydro power generation project in the area of
Pussellawa. This project intends to supply power and promote industries in the area along with
enhancing life around the area. Table 4.1 summarises the details of the project which is obtained
from the FLC Hydro power. This project is estimated to be operating for at least 20 years.
Table 4.1: Summarised detail of project
Capacity 1 MW
Plant Factor 42 %
Initial capital requirement LKR Mn 179
4.2. Revenues
Revenues are identified base on the production of energy during a year. Energy production from
this power plant depends on the power factor and the maximum capacity it can provide. Therefore
average production of energy from this plant throughout year is,
Energy produced per year (E
production
) = Capacity Plant Factor Hours
E
production
= 1000 42% 8760 = 3.679 10
6
kWh
This produced energy is distributed among customers based on a 3-tier tariff system. 3-tier tariff
systems is estimated for the entire project time period. Revenue generated in each year again
calculated,
Project revenue
yearly
= E
production
3 tier tariff rate

Figure 4.1: Revenue generation
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
0 5 10 15 20
R
e
v
e
n
u
e

(
L
K
R

i
n

M
i
l
l
i
o
n
s
)
T
a
r
i
f
f

R
a
t
e

(
L
K
R
)
Years
Revenue
6

Figure 4.1 illustrates revenue generation variation along with the 3 tier tariff rate changes within
the project life time. Refer section 4.5 for tariff rates and revenue generation data.
4.3. Expenditures
There are two categories of yearly expenditures identified for this project. They are,
1. Operations and maintenance cost
2. Royalty payment
Yearly operations and maintenance cost is identified as 3% from the initial investment made for
the project.
Operations and maintenance cost (O&M) = 3% 179 Mn = LKR 5.37 Mn
Royalty payment is 10% from the revenue incurred from the project. Figure 4.2 illustrates the
royalty payment variations used in for project evaluation. Refer section 4.5 for royalty payment
data.

Figure 4.2: Royalty payment variations
4.4. Cost of Capital
Cost of capital calculation for this project involves cost of debt calculation and cost of equity
calculation because this project involves debt raising along with equity raising.
Capital cost
This is a mini hydro electricity generation project. It is estimated that the constructions for this
project will take 2 years and the total capital cost will be Rs 179 Mn. So the total capital investment
is done from financing from private banks and raising equity fund for the rest.

0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
0 5 10 15 20
L
K
R

i
n

M
i
l
l
i
o
n
s
Years
Royalty Payment
7

Table 4.2: Capital cost breakdown
Year 1 2
Equity 40% 0%
Debt 10% 50%
Table 4.2 illustrates how capital is going to be financed during 2 construction years.
Weighted average cost of capital
This project is funded with 60% debt and 40% equity. Therefore the WACC is,
WACC = 60% 17.86%+40% 31.97% = 23.50 %


8

4.5. Net Present Value Calculation
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Energy Production
(GWh) 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68 3.68
3 tier tariff (LKR) 15.7 15.9 16.0 16.1 16.3 16.5 16.6 16.8 8.0 8.3 8.5 8.8 9.1 9.4 9.7 8.5 9.1 9.7 10.4 11.1
Investment
(LKR millions) -179
Revenue (LKR millions) 57.9 58.3 58.8 59.4 59.9 60.6 61.2 62.0 29.6 30.4 31.3 32.3 33.4 34.6 35.8 31.3 33.5 35.8 38.3 40.9
Expenditures
O&M (LKR millions) -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4
Royalty (LKR millions) -5.8 -5.8 -5.9 -5.9 -6.0 -6.1 -6.1 -6.2 -3.0 -3.0 -3.1 -3.2 -3.3 -3.5 -3.6 -3.1 -3.3 -3.6 -3.8 -4.1

Net cash flow -179 46.7 47.1 47.6 48.1 48.6 49.1 49.7 50.4 21.2 22.0 22.8 23.7 24.7 25.7 26.9 22.8 24.7 26.8 29.1 31.5
DCF @ 23.5% WACC 1.00 0.81 0.66 0.53 0.43 0.35 0.28 0.23 0.18 0.15 0.12 0.10 0.08 0.06 0.05 0.04 0.03 0.03 0.02 0.02 0.01
PV of cash flows -179 37.8 30.9 25.3 20.7 16.9 13.8 11.4 9.3 3.2 2.7 2.2 1.9 1.6 1.3 1.1 0.8 0.7 0.6 0.5 0.5
NPV (LKR millions) 4.13
4.6. Payback Period Calculation
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Net cash flow
(LKR millions) -179 47 47 48 48 49 49 50 50 21 22 23 24 25 26 27 23 25 27 29 31
Remainder (LKR millions) -179 -132 -85 -38 10 59 108 158 208 230 252 274 298 323 349 375 398 423 450 479 510
Therefore the payback period is,
Payback period = 3 +
38
48
12 = 3 years and 9.5 months
9

4.7. Internal Return Rate
Internal return rate calculation used 23.5 % (i.e. WACC) and 24.5 % as discounting percentages.
Therefore,
NPV1 discounted at 23.5% = LKR 4.13 million
NPV2 discounted at 24.5% = LKR -2.08 million
IRR = r
1
+
r
2
r
1
NPV
2
NPV
1
(NPV
1
) = 23.5
24.5 23.5
2.08 4.13
4.13 = 24.17%
4.8. Project Evaluation
This project has a payback period of 3 years and 9.5 months. This is a good payback period
considering the fact that this project supposed to run for 20 years. But depending solely on payback
period and saying this project is a go is risky because it doesnt consider time value of money. It
also neglects any future cash flows occurring after the payback period.
This project is having a positive net present (NPV) value of LKR 4.13 million at weighted average
cost of capital of 23.5%. Having a positive NPV is good. This project also has internal return rate
(IRR) of 24.17%. Both of these measures and payback period also says that this project should be
accepted when looking at the financing aspect of this project.
REFERENCES

[1] A. Damodaran, Damodaran Online, [Online]. Available:
http://pages.stern.nyu.edu/~ADAMODAR/.