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.

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.

Table of Contents
Table of Contents.........................................................................................................3
INTRODUCTION........................................................................................................4
1.1 Introduction..........................................................................................................4
1.2 Objectives.............................................................................................................4
1.3 Methodology........................................................................................................5
Hypothetical MHP.......................................................................................................6
2.1 Hypothetical Technical details.............................................................................6
2.2 Major components of Micro Hydro.....................................................................6
2.3Financial and economical analysis of MH project................................................6
FINANCIAL ANALYSIS............................................................................................8
3.1 Net Present Worth (NPW) Criterion....................................................................8
3.2Annual Equivalent.................................................................................................9
3.3Internal Rate of Return (IRR)................................................................................9
3.4Unit energy cost....................................................................................................9
3.5Benefit Cost ratio..................................................................................................9
3.6Subsidy policy of AEPC in MHP........................................................................10
3.7Assumptions for economic and financial analysis..............................................10
RESULT......................................................................................................................11
4.1 Total revenue......................................................................................................11
4.2 Annual cost.........................................................................................................11
4.3 Financial analysis without subsidy.....................................................................12
4.4 Financial analysis with subsidy..........................................................................13
4.5 Economic benefit................................................................................................14
4.6 Economic analysis without subsidy...................................................................15
4.7 Economic Analysis with subsidy.......................................................................17
4.8 Unit cost calculation...........................................................................................18
References...................................................................................................................21

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.

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%.

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.

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 projects 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

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

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.
Energy
demand (in
kWh)

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

84096
87460
90958
94597
98380
102316
106408
110665
115091
119695
124483
129462
134640
140026
145627

Revenue
(in Rs)
420480
437299
454791
472983
491902
511578
532041
553323
575456
598474
622413
647310
673202
700130
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
0
1
2

Manager
60000
63000

operato
r1
42000
44400

operato
r2
42000
44400

Total
salary
144000
151800

Office
expenses
5000
5200

Miscellan
eous
4000
4160

Operation
and
Maintainen
ce cost

Replace
ment
cost

72726
72726

Total Annual
cost (in Rs)
225726
233886

11

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

66000
69000
72000
75000
78000
81000
84000
87000
90000
93000
96000
99000
102000

46800
49200
51600
54000
56400
58800
61200
63600
66000
68400
70800
73200
75600

46800
49200
51600
54000
56400
58800
61200
63600
66000
68400
70800
73200
75600

159600
167400
175200
183000
190800
198600
206400
214200
222000
229800
237600
245400
253200

5408
5624
5849
6083
6327
6580
6843
7117
7401
7697
8005
8325
8658

4326
4499
4679
4867
5061
5264
5474
5693
5921
6158
6404
6660
6927

72726
72726
72726
72726
72726
72726
72726
72726
72726
72726
72726
72726
72726

23520

24696

25931

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

Total
Total
Net
Net cash flow
revenue cost
Depreciation profit
(Rs)
363630
0
-3636300
420480 225726
242420 -47666
194754
437299 233886
242420 -39007
203413
454791 242060
242420 -29689
212731
472983 250250
242420 -19687
222733
491902 281975
242420 -32493
209927
511578 266676
242420
2482
244902
532041 274914
242420 14707
257127
553323 283169
242420 27734
270154
575456 291443
242420 41593
284013
598474 324432
242420 31622
274042
622413 308048
242420 71945
314365
647310 316381
242420 88509
330929
10604
673202 324735
242420
7
348467
12459
700130 333112
242420
8
367018
11827
728135 367442
242420
3
360693
NPV of cash flows from year 1 to 10
NPV
AE (10%)

Rs1,909,346.02
(Rs1,726,953.98)
(Rs227,049.16)

12

242060
250250
281975
266676
274914
283169
291443
324432
308048
316381
324735
333112
367442

IRR

1.365%

The cash flow diagram is shown below

Net cash flow without subsidy (Rs)
1000000
500000
0
-500000

10

11

12

13

14

15

-1000000
-1500000
-2000000
-2500000
-3000000
-3500000
-4000000
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.

Year
0
1
2
3
4
5
6
7
8
9

Total
Total
Net
revenue cost
Depreciation profit
Net cash flow (Rs)
159630
0
-1596300
420480 225726
106420 88334
194754
437299 233886
106420 96993
203413
454791 242060
106420 106311
212731
472983 250250
106420 116313
222733
491902 281975
106420 103507
209927
511578 266676
106420 138482
244902
532041 274914
106420 150707
257127
553323 283169
106420 163734
270154
575456 291443
106420 177593
284013

13

10
11
12
13
14
15

598474
622413
647310
673202
700130
728135

324432
308048
316381
324735
333112
367442

106420
106420
106420
106420
106420
106420

167622
207945
224509
242047
260598
254273

NPV of cash flows from year 1 to 10

NPV
AE (10%)

274042
314365
330929
348467
367018
360693
Rs1,909,346.02
Rs313,046.02
Rs41,157.34

IRR

12.899%

The cash flow diagram is shown below

Net cash flow with subsidy (Rs)
500000
0
0

10 11 12 13 14 15

-500000
-1000000
-1500000
-2000000

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)

14

Quantity
saved
Price

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

6194
6194
6194
6194
6194
6194
6194
6194
6194
6194
6194
6194
6194
6194
6194

Total
Annual cost
(in Rs)

Quantity
saved
Price
73
73
73
73
73
73
73
73
73
73
73
73
73
73
73

8532
8532
8532
8532
8532
8532
8532
8532
8532
8532
8532
8532
8532
8532
8532

25
25
25
25
25
25
25
25
25
25
25
25
25
25
25

665462
665462
665462
665462
665462
665462
665462
665462
665462
665462
665462
665462
665462
665462
665462

4.6 Economic analysis without subsidy

Total
Total
Net
Year
revenue cost
Depreciation profit
363630
0
0
1

420480

225726

242420

-47666

437299

233886

242420

-39007

454791

242060

242420

-29689

472983

250250

242420

-19687

491902

281975

242420

-32493

511578

266676

242420

2482

532041

274914

242420

14707

553323

283169

242420

27734

9
10

575456
598474

291443
324432

242420
242420

41593
31622

Net cash flow

Benefit (Rs)
-3636300
66546
2
66546
2
66546
2
66546
2
66546
2
66546
2
66546
2
66546
2
66546
2
66546

860250
868909
878227
888229
875423
910398
922623
935650
949509
939538

15

11

622413

308048

242420

71945

12

647310

316381

242420

13

673202

324735

242420

14

700130

333112

242420

15

728135

367442

242420

88509
10604
7
12459
8
11827
3

2
66546
2
66546
2
66546
2
66546
2
66546
2

NPV of cash flows from year 1 to 10

ENPV
AE (10%)

979861
996425
1013963
1032514
1026189
Rs6,971,161.51
Rs3,334,861.51
Rs438,446.84

EIRR

23.616%

Total cost
Total benefit

5713584
9048446

B/C ratio

1.58

Economic Net cash flow without subsidy (Rs)

2000000
1000000
0
0

10

11

12

13

14

-1000000
-2000000
-3000000
-4000000
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.

16

15

4.7 Economic Analysis with subsidy

Total
Total
Net
Net cash flow
Year
revenue cost
Depreciation profit
benefits (Rs)
159630
0
0
-1596300
1 420480 225726
106420 88334 665496
860250
2 437299 233886
106420 96993 665496
868909
10631
3 454791 242060
106420
1 665496
878227
11631
4 472983 250250
106420
3 665496
888229
10350
5 491902 281975
106420
7 665496
875423
13848
6 511578 266676
106420
2 665496
910398
15070
7 532041 274914
106420
7 665496
922623
16373
8 553323 283169
106420
4 665496
935650
17759
9 575456 291443
106420
3 665496
949509
16762
10 598474 324432
106420
2 665496
939538
20794
11 622413 308048
106420
5 665496
979861
22450
12 647310 316381
106420
9 665496
996425
24204
13 673202 324735
106420
7 665496
1013963
26059
14 700130 333112
106420
8 665496
1032514
25427
15 728135 367442
106420
3 665496
1026189
NPV of cash flows from year 1 to 10
ENPV
AE (10%)

$6,971,161.51
$5,374,861.51
$706,653.34

EIRR

54.826%

Total cost
Total benefit

3673584
9048446

B/C ratio

2.46

17

Economic Net cash flow with subsidy (Rs)

1500000
1000000
500000
0
-500000

10 11 12 13 14 15

-1000000
-1500000
-2000000
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
Energy
demand (in
kWh)

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

84096
87460
90958
94597
98380
102316
106408
110665
115091
119695
124483
129462
134640
140026
145627

annual
cost
84,096
87,460
90,958
94,597
98,380
102,316
106,408
110,665
115,091
119,695
124,483
129,462
134,640
140,026
145,627

Total Annual
cost (in Rs)
with subsidy
1596300
225726
233886
242060
250250
281975
266676
274914
283169
291443
324432
308048
316381
324735
333112
367442

Total annual cost

(in Rs) without
subsidy
3636300
225726
233886
242060
250250
281975
266676
274914
283169
291443
324432
308048
316381
324735
333112
367442

18

Total operating cost

Initial Investment with subsidy
Total cost

2,077,284
1,596,300
3,673,584

Total operating cost

Initial Investment without subsidy
Total cost

2,077,284
3,636,300
5,713,584

Total cost
Unit cost with subsidy
Unit cost without subsidy

797326.01
4.61
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.

19

CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATION

5.1 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.

20

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

21