Asian Institute of Technology Dr.

Shobhakar Dhakal
School of Environment, Resources and Development 29
April 2016

Final Exam
ED72.13 Development and Evaluation of Energy Projects

Closed-Book Examination (35%) Time Allowed: 3

hours

1. (1) What are differences in Tax and Book Deprecitation method? (1) In what way
the policies of Accelerated Depreciation provides advantages to Renewable
energy project developers such as wind and Solar over the Straight Line
Depreciation?
2. (2) What is the difference between actual dollar and constant dollar when
considering (a) today as the reference point, and (b) 2 years later as the
reference point at inflation rate of 5%?
3. (1) If the project cash flow is given in constant dollar, which interest rate you
must use in the present worth calculation, choose one:
a) Inflation adjusted (market) interest rate
b) Inflation free (real) interest rate
c) Average of both
4. (2) If the project cash flows are given in actual dollar, describe two possible
ways through which present worth of the cash flows can be calculated?
5. (1) When IRR-based project decision needs to be taken using actual dollar cash
flows, to which interest rate this IRR needs to be compared for project
acceptability?
a) Inflation free MARR
b) Inflation adjusted MARR
c) Interest rate by central bank
6. (2) For prices that are incresing at an annual inflation rate of 7% in the first year
and 10% in the second year, determine the average annual inflation rate over
two years (show step-by-step calculation method too.
7. (3) Describe the key differences between sensitivity analysis, break-even
analysis and scenario analysis in financial analysis and highlight the
strength/utility of the each method?
8. (2) Net cash flow (in constant th US dollars)
Year 0 - 75,000
Year 1 32,000
Year 2 35,700
Year 3 32,800
Year 4 29,000
Year 5 58,000
The general inflation rate is 5%. Calculate, present worth of these cash flows at
inflation-free interest rate of 10%.
9. (2) Probability of wind electricity demand in MWh (X) being a particular value x is
P(X = x) is given below
Units (x) P(X = x)

1
 5,600 0.1
4,000 0.7
3,200 0.2
The probabilities for unit selling price (Y) of wind electricity being a particular
price ($/Kwh) y is P(Y=y) is:
Unit price (y) P(Y = y)
0.6 0.2
0.4 0.6
0.3 0.2
(a) For a given unit price of $0.6, the conditional probability that the company
can sell 4,000 units is 0.40. What is the probability of this joint event?
(b) For a given demand of 5,600, the conditional probability that the company
can sell at 0.6 $ is 0.5. What is the probability of this joint event?
10.(2) How economic evaluation of energy projects differ from financial evaluation
in terms of objectives/goals, proponets, scopes and boundaries of costs and
benefits, and basis of attributing the input and output prices (explain in tabular
form, if possible)? (1) What is the meaning of shadow price, why they differ
from the market price?
11.(2) On what ways, the approach/methods for economic evaluation of the public
sector energy projects differ from the economic evaluation of the private sector
energy projects?
12.(1) What are the major financing sources for equity and debt financing? (1) what
are the key costs of equity and debt financing? (1) Why companies often opt for
debt financing even if equity is available? (1) What is debt-ratio (1) why
companies try to maintain targeted debt-ratio despite benefits of debt financing?
13.(4) A company needs to raise $50 mn for a power plant. It targets capital
structure of 0.4 as debt ratio. The company has B =2 (B = stock price volatility
of firms stock price relative to S&P 500), the risk-free interest rate is 6%,
average market return is 13% (all are inflation adjusted). (a) Determine the cost
of equity to finance new unit in power plant (b) Determine the cost of capital if
cost of debt is 7%.
14.(4) Consider three public sector energy projects (Solar, Wind, and Biomass) with
same service life. If the three projects are mutually exclusive, which would be
the best alternative from B/C criterion (show process too)?
Solar Wind Biomass
Investment cost, I $10,000 40,000 28,000
O&M Cost, C $ 8,000 16,000 2,000
Benefits, B $ 24,000 60,000 42,000