ABSTRACT

The objective of this report is to analyse the

feasibility of Pakgen Power Limited Company
regarding their new product line of solar energy
solutions. The feasibility includes a detailed
capital budgeting and cash flows analysis
supported by a set of recommendations in this

PAKGEN SOLAR regard.

Course: Corporate Finance

ENERGY Shehar Yar Ahmed: PAF05183016

SOLUTIONS
Feasibility Report: Part 2 and 3
Contents
Executive Summary......................................................................................................................... 2
Introduction of Pakistan’s Energy Sector....................................................................................... 3
Energy Sector’s Contribution to GDP ............................................................................................ 3
Overall Analysis of Energy Sector’s Capital Structure .................................................................. 4
Pakgen Power Limited .................................................................................................................... 5
Potential of Solar Energy Projects in Pakistan ............................................................................... 5
Pakgen Solar Energy Solutions ....................................................................................................... 6
Project’s Feasibility Report............................................................................................................. 6
Estimated Energy Consumption Per Household ........................................................................ 6
Components of Solar Energy Solution ........................................................................................ 7
Estimation of Initial Investment (CAPEX) ................................................................................. 7
Land ......................................................................................................................................... 8
Building .................................................................................................................................... 8
Furniture and Fixture .............................................................................................................. 8
Equipment and other Assets .................................................................................................... 8
Total Initial Outlay .................................................................................................................. 9
Depreciation of Assets ................................................................................................................. 9
Estimation of Operating Expenses ............................................................................................ 10
Human Resource Planning ........................................................................................................ 10
Project’s Cost of Capital (Capital Structure) ........................................................................... 10
Project’s Operating Cash Flows ................................................................................................ 11
Capital Budgeting Decisions ...................................................................................................... 12
Recommendations ......................................................................................................................... 13
Conclusion ..................................................................................................................................... 13
References ...................................................................................................................................... 14

1
Executive Summary
The objective of this report is to present a rationale regarding the viability of the
renewable sources of energy in Pakistan. Energy is one of the key inputs which are required by
the country to operate its various sectors like textile, agriculture, fertilizer, construction and
other manufacturing and servicing concerns. Since past two decades, Pakistan is in a consistent
energy crisis in which there is a significant shortage of electricity to the industry and the
households. Although CPEC has introduced a number of new energy projects which are
operated on coal and hydropower basis but the volume of renewable sources of energy are
limited as only one major solar power plant has been installed (Quaid E Azam Solar Park). In
this report, we have analysed that how a medium scale energy sector company can add solar
power solutions to its product line and provide sustainable energy solutions to the consumers.
The company we have selected for this purpose is Pakgen Power Limited and its relevant
capital structure analysis has been performed.

2
Introduction of Pakistan’s Energy Sector
Energy is produced, spread, circulated, and retail delivered by two straight up
assimilated public sector efficacies in Pakistan. One is Water and Power Development
Authority (WAPDA) for all other regions except for Karachi and the other is Karachi Electric
or K-Electric for short in lieu of the city of Karachi and its neighboring areas. About forty-two
independent power producers (IPPs) contribute knowingly in electricity production in Pakistan
(SMEDA, 2017).

Since Pakistan’s energy sector is an emerging market and for years, the difficulty of
harmonizing the state's supply in contradiction of the demand for energy had continued to be a
principally unsettled matter. The nation encountered momentous encounters in refurbishing its
system accountable for the supply of power. Electricity generators remained on the lookout for
an equivalence in returns for together the native and the remote investors demonstrating it to
be solitary of the main issues in superintending an upwelling in power generation after the
country was fronting increasing shortages. Added glitches contained within the lack of
efficacy, growing demands for electricity, and political unsteadiness (Finance Division, 2017).

The largest consumers of electricity are the Provincial and federal agencies, who every
so often do not recompense their bills. Because of the fact of over-reliance on fossil fuels,
energy production had contracted by equal to 50%. In addition, the state was smashed by its
most horrible energy crisis in 2007 when manufacture cut down by 6000 Megawatts and
gigantic power cut trailed suit. Power shutdowns and load shedding had turned out to be severe
in Pakistan earlier in 2016. However, the state includes four foremost power manufacturers:
WAPDA, K-Electric, IPPs and Pakistan Atomic Energy Commission (PAEC).

Energy Sector’s Contribution to GDP

Energy generation & supply contributes 8.55 percent in the industrial sector while its
share in GDP is 1.78 percent as per 2017. The serious necessity for adequate, consistent and
reasonable energy supply has occupied by the current administration on highest priority. Exact
from the start, the current government had given high priority to energy sector while the subsidy
for energy sector which was Rs. 464 billion and 2.3 percent of the GDP in fiscal year 2012 has
been constantly concentrated to Rs. 217 billion, 0.7 percent of GDP in fiscal year 2016. During
July-March fiscal year 2017, the funding for energy sector continued at Rs. 85 billion as a
comparison to Rs. 99 billion in the consistent epoch last fiscal year (Finance Division, 2017).

3
 The administration plot above an epoch of next 10 years is China-Pakistan Economic
Corridor (CPEC) in the long-run. The CPEC envisions plans in energy and substructure, with
overall monetary expenditure of about US $46 billion. Monetary spending of Energy sector’s
plans is projected to be US $34.74 billion. Energy sector’s plans take account of power
generation and supply projects to be realized in IPP means. Twelve projects have been
contracted in Energy Sectors in which eight projects in PPIB and four projects in AEDB till
March 2017 (Finance Division, 2017).

Additionally, in the course of July-March fiscal year 2017, even though mounted
capacity augmented to 25.1 million Megawatts from 22.9 million Megawatts in conforming
epoch last year, on the other hand, there was deterioration in production as it continued at
85,206 GW/h thru July-March fiscal year 2017 equated to 101,970 GW/h for the duration of
July-March fiscal year 2016. The key purpose of the deterioration is dawdling down in the part
of hydro in power generation equated to 34 percent during the conforming period last year
(Finance Division, 2017).

Overall Analysis of Energy Sector’s Capital Structure

In capital structure analysis we take 10 largest companies of energy sector according to
largest market capitalization. In analysis we check the capital structure of companies last five
years from 2013 to 2017 and check the trend follow in industry. After our analysis in first
company Altern energy in 2013 using 31% debt and in coming year debt percentage reduce
and company not take any debt in 2016 and 2017 run on 100% equity. Second company Engro
power generation in 2013 using 45% debt and 55% equity and in coming year 2014 debt reduce
to 36% and company going toward increasing equity and in 2017 debt percentage reduce to
20%.

In Hub power generation company using 26% debt in 2013 and in coming years debt
percentage reduce and near to end 4% in 2017 and use 96% equity. In Kohinoor Energy
Company used only 6% debt in 2013 and 3% in 2014 and in next year company go toward
100% equity and not take any debt. In Kohinoor power company in 2013 take 13% debt and
reduce to 4% in 2014 and 1% in year 2017. In Kot Addu power company in 2013 take 4% debt
and used 96% equity which come to 100% on equity in 2017 and not take any debt.

In Nishat Chunian power limited company take 50% debt and 50% equity in 2013 and
gradually debt come downward and become 26% in 2017 and use equity 74%. Nishat power
limited use 51 % debt in 2013 and 49% equity. Debt percentage decrease in 2014 and 2015 but

4
very low in 2016 only 4% then in 2017 company take more debt and debt weight is 23% and
equity weight is 77%. In Pak generation power limited company not take any debt in 2013 and
2014 and run on 100% equity then take 10% debt in 2015 and again reduce debt in 2016 to 8%
and use 92% equity and 4% debt in 2017 and 96% equity.

In Sitara energy company use 56% debt in 2013 and 44% equity then in coming year
debt percentage reduce to 36% in 2015 and 1% in 2017 and use 99% equity. Trend show mostly
companies use less debt as compare to equity and go toward decreasing debt in coming years
and use high ratio of equity in capital structures.

In our capital structure analysis of energy sector in Pakistan companies mostly use
equity and use less debt ratio in capital structure. In some years companies not take any debt
and mostly company reduce debt ratio as compared to in previous. When we use industry
average analysis and take average of 50 years data of 10 companies, we get 17% debt and 83%
equity ratio which is industry average ratio which we use in our expansion project and compute
WACC for NPV and IRR. Because this weights mostly use in our industry where we want to
implement our project.

Pakgen Power Limited

We have selected Pakgen Power Limited Company for expansion purposes and it was
established on June 22, 1995 under the provisions of Companies Ordinance 1984. The
registered office of the company is situated in Lahore. The company is currently engaged in
the ownership and the management of an oil-fired power station in Mehmood Kot,
Muzaffargarh which have a gross capacity of 365 MW. The company is listed on Pakistan
Stock Exchange (PSX) and is committed to fulfil the energy needs of the country by making a
minimum impact on the environment (Pakgen Power, 2018). In order to enhance the
environment commitment and the increasing the energy production for the country, we have
designed the feasibility report of the company based on which the decisions regarding the
viability of their solar energy solutions have been presented.

Potential of Solar Energy Projects in Pakistan

Pakistan is situated in a region where it has abundant access to the sun light during
summer and even in winter as well. Due to these reasons, Pakistan has a potential of 2.334
million MW of electricity which can be produced with the help of solar energy each year. So,
it is a prime opportunity for large industrialists to enter the market and seize that potential

5
(Muhammad, Raza, S., & Khan, 2017). The solar energy potential in Pakistan can be observed
with the help of following map (Muhammad, Raza, S., & Khan, 2017):

Hence, one can observe that almost every province of the country is equipped with the
ability to produce sufficient amount of energy through solar energy.

Pakgen Solar Energy Solutions

The new product line will of the selected company will be referred as the Pakgen Solar
Energy Solutions and company will sell its products through a new warehouse established in
Lahore to the local distributors of Lahore and adjacent cities. It will be a pilot project and based
on its success, the solar energy solutions will be provided to the other parts of the country as
well. The project viability is determined with the help of a capital budgeting process in this
regard and decision is made on the basis of NPV, Payback Period, IRR and the Profitability
Index. The feasibility report of the project is presented as follows.

Project’s Feasibility Report

The project’s feasibility report has been presented in the following headings (SMEDA,
2017):

Estimated Energy Consumption Per Household

The estimated energy consumption in a middle-income family during the summer
season has been presented as follows:

6
 Appliance Capacity(Watts) No. of Units Daily use (Hours) Daily Use (kWh) Monthly Use (kWh)
Fans 80 4 15 4.8 144
LED Bulb 10 8 12 0.96 28.8
Fridge 90 1 24 2.16 64.8
LED TV 30 1 8 0.24 7.2
Oven 1200 1 1 1.2 36
Laptops 40 2 8 0.64 19.2
Washing Machine 900 1 2 1.8 54
Iron 1000 1 1 1 30
Total 3350 12.8 384

The capacity of the appliances is estimated to be 3350 watts which is equal to 12.8 kWh
a day and 384 kWh a month. Hence, a solution of 4 kW is suggested for such a household in
this case.

Components of Solar Energy Solution

We have determined the cost and the relative components of a solar solution as
follows:

Name of Component Per Unit Cost Capacity (Watts) Import Duty Total Cost of One Solution
PV Panels $ 0.20 3350 0% $ 670.00
Mounting Equipment $ 0.06 3350 0% $ 201.00
DC to AC Inverter $ 150.00 3350 0% $ 150.00
Tracking Mounts $ 0.10 3350 0% $ 335.00
Disconnect Switches $ 3.20 0% $ 3.20
Wiring and Fuse Box $ 3.00 5% $ 3.15
AGS Batteries $ 93.00 4 $ 372.00
Power Meter $ 30.00 0% $ 30.00
Total Cost $ 1,764.35
Total Cost in PKR PKR 236,667.00
Margin 17%
Sales Price $ 2,064.29
Sales Price in PKR PKR 277,000.00

With the exception of batteries all the equipment will imported from China and it will
cost around Rs. 236, 667 per unit. We have decided to charge a margin of 17% due to which
the sales price of each unit will be Rs.277, 000.

Estimation of Initial Investment (CAPEX)

Now we will explain one of the most important components of the project, the initial
investment. The initial investment along with the detail of fixed assets to be incorporated in the
project are listed as follows:

7
Land
A total of 5700 square foot land will be acquired at a total cost of Rs. 6, 270, 000.

Land
Area (Sq.Ft) 5700
Unit Cost PKR 1,100.00
Total Cost PKR 6,270,000.00

Building
The building will be divided into four parts along with their respective detail and cost
incurred on each square foot. The total cost of construction will be Rs. 3, 480, 000.

Building
Details Estimated Sq.Ft Area Unit Cost Total Cost
Office Space 1200 PKR 900.00 PKR 1,080,000.00
Finished Goods Storeroom 3000 PKR 700.00 PKR 2,100,000.00
Parking 1000 PKR -
Rest Room 500 PKR 600.00 PKR 300,000.00
Total 5700 PKR 3,480,000.00

Furniture and Fixture

A total of Rs.272, 000 will be incurred on purchase of furniture and fixture and cost
division is performed as follows:

Furniture and Fixture

Item Name Quantity Unit Cost Total Cost
Chairs 14 PKR 4,000.00 PKR 56,000.00
Tables 6 PKR 20,000.00 PKR 120,000.00
Sofas 6 PKR 16,000.00 PKR 96,000.00
Total Cost PKR 272,000.00

Equipment and other Assets

The detail of equipment and other assets to be used is listed as follows:

Equipment and Other Assets

Item Name Quantity Unit Cost Total Cost
Laptop (HP Core i3) 3 PKR 45,000.00 PKR 135,000.00
Computer System 3 PKR 15,000.00 PKR 45,000.00
Printer (HP) 5 PKR 17,000.00 PKR 85,000.00
Telephone Set 6 PKR 1,000.00 PKR 6,000.00
LED Screens (Samsung) 2 PKR 45,000.00 PKR 90,000.00
CCTV System +DVR 8 PKR 30,000.00 PKR 30,000.00
Water Dispenser 1 PKR 12,000.00 PKR 12,000.00
Refrigrator 1 PKR 50,000.00 PKR 50,000.00
Air Conditioners (Haier 1.5 Ton) 3 PKR 60,000.00 PKR 180,000.00
Delivery Vehicles (Suzuki Pickup) 3 PKR 750,000.00 PKR 2,250,000.00
Total Cost PKR 2,883,000.00

8
Total Initial Outlay
Hence, the total initial cash outflow which will be incurred before the commencement
of the project is explained as follows:

Total ICO
Land PKR 6,270,000.00
Building PKR 3,480,000.00
Furniture PKR 272,000.00
Equipment and Other Equipment PKR 2,883,000.00
Working Capital
Current Assets PKR 20,160,000.00
Current Liabilities PKR 17,280,000.00
Change in Working Capital PKR 2,880,000.00
Total ICO PKR 15,785,000.00

Assumption for working capital in current assets there will be an investment required
equal to 140% of operating expenses and due to it there will be a volume of current liabilities
to be raised by 120% of operating expenses.

Depreciation of Assets
The assets which has been identified above will be depreciated on straight line method
and their detail along with their estimated useful life is listed as follows:

Depreciation
Name of Asset Cost Useful Life
Year 1 Year 2 Year 3 Year 4 Year 5
Laptop (HP Core i3) PKR 135,000.00 5 PKR 27,000.00 PKR 27,000.00 PKR 27,000.00 PKR 27,000.00 PKR 27,000.00
Computer System PKR 45,000.00 5 PKR 9,000.00 PKR 9,000.00 PKR 9,000.00 PKR 9,000.00 PKR 9,000.00
Printer (HP) PKR 85,000.00 5 PKR 17,000.00 PKR 17,000.00 PKR 17,000.00 PKR 17,000.00 PKR 17,000.00
Telephone Set PKR 6,000.00 3 PKR 2,000.00 PKR 2,000.00 PKR 2,000.00 PKR 2,000.00 PKR 2,000.00
LED Screens (Samsung) PKR 90,000.00 5 PKR 18,000.00 PKR 18,000.00 PKR 18,000.00 PKR 18,000.00 PKR 18,000.00
CCTV System +DVR PKR 30,000.00 3 PKR 10,000.00 PKR 10,000.00 PKR 10,000.00 PKR 10,000.00 PKR 10,000.00
Water Dispenser PKR 12,000.00 4 PKR 3,000.00 PKR 3,000.00 PKR 3,000.00 PKR 3,000.00 PKR 3,000.00
Refrigrator PKR 50,000.00 5 PKR 10,000.00 PKR 10,000.00 PKR 10,000.00 PKR 10,000.00 PKR 10,000.00
Air Conditioners (Haier 1.5 Ton) PKR 180,000.00 5 PKR 36,000.00 PKR 36,000.00 PKR 36,000.00 PKR 36,000.00 PKR 36,000.00
Delivery Vehicles (Suzuki Pickup) PKR 2,250,000.00 5 PKR 450,000.00 PKR 450,000.00 PKR 450,000.00 PKR 450,000.00 PKR 450,000.00
Building PKR 3,480,000.00 10 PKR 348,000.00 PKR 348,000.00 PKR 348,000.00 PKR 348,000.00 PKR 348,000.00
Furniture and Fixtures PKR 272,000.00 5 PKR 54,400.00 PKR 54,400.00 PKR 54,400.00 PKR 54,400.00 PKR 54,400.00
Total PKR 6,635,000.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00

9
Estimation of Operating Expenses
The operating expenses which will incur during the course of project life are listed as
follows (SMEDA, 2017):

Name of Expense Monthly Expense Year 1 Year 2 Year 3 Year 4 Year 5

Electricity PKR 60,000.00 PKR 720,000.00 PKR 748,800.00 PKR 801,216.00 PKR 857,301.12 PKR 917,312.20
Telephone and Internet PKR 5,000.00 PKR 60,000.00 PKR 62,400.00 PKR 66,768.00 PKR 71,441.76 PKR 76,442.68
Advertising Expense PKR 40,000.00 PKR 480,000.00 PKR 499,200.00 PKR 534,144.00 PKR 571,534.08 PKR 611,541.47
Insurance Expense PKR 50,000.00 PKR 600,000.00 PKR 624,000.00 PKR 667,680.00 PKR 714,417.60 PKR 764,426.83
Fuel of Vehicles PKR 40,000.00 PKR 480,000.00 PKR 499,200.00 PKR 534,144.00 PKR 571,534.08 PKR 611,541.47
Salaries PKR 960,000.00 PKR 10,920,000.00 PKR 11,356,800.00 PKR 12,151,776.00 PKR 13,002,400.32 PKR 13,912,568.34
Water Charges PKR 5,000.00 PKR 60,000.00 PKR 62,400.00 PKR 66,768.00 PKR 71,441.76 PKR 76,442.68
Depreciation of Assets PKR 984,400.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00
Repairs and Maintenance PKR 40,000.00 PKR 480,000.00 PKR 499,200.00 PKR 534,144.00 PKR 571,534.08 PKR 611,541.47
Miscellaneous Expense PKR 50,000.00 PKR 600,000.00 PKR 624,000.00 PKR 667,680.00 PKR 714,417.60 PKR 764,426.83
Total Operating Expenses PKR 15,384,400.00 PKR 15,960,400.00 PKR 17,008,720.00 PKR 18,130,422.40 PKR 19,330,643.97

All expenses are adjusted to an annual increase of 4% with the exception of depreciation
which will remain constant as it has been calculated on straight line method.

Human Resource Planning

As a new facility is to be established for the purpose of storing solar solutions several
individuals will be needed to manage that facility. The detail of required human resource
personnel along with their remuneration has been listed as follows (SMEDA, 2017):

Name of Personnel Salary P.M. No. of Personnel Total Exepense P.M. Total Exepense P.A.
General Manager PKR 80,000.00 1 PKR 80,000.00 PKR 960,000.00
Operations Manager PKR 60,000.00 1 PKR 60,000.00 PKR 720,000.00
Marketing Manager PKR 60,000.00 1 PKR 60,000.00 PKR 720,000.00
Sales Manager PKR 60,000.00 1 PKR 60,000.00 PKR 720,000.00
Installer PKR 30,000.00 8 PKR 240,000.00 PKR 2,880,000.00
Maintenance PKR 30,000.00 5 PKR 150,000.00 PKR 1,800,000.00
Admin Executive PKR 40,000.00 2 PKR 80,000.00 PKR 960,000.00
Accounts Executive PKR 40,000.00 2 PKR 80,000.00 PKR 960,000.00
Drivers PKR 20,000.00 3 PKR 60,000.00 PKR 720,000.00
Security Guards PKR 20,000.00 2 PKR 40,000.00 PKR 480,000.00
Total Cost PKR 910,000.00 PKR 10,920,000.00

Salaries are subject to a 4% annual increase which is estimated and can be changed as
per the performance of the employees.

Project’s Cost of Capital (Capital Structure)

Now, we have analysed the capital structure of the company based on which the
weighted average cost of capital has been determined. WACC has been computed by using the
following formula:

10
 𝑾𝑨𝑪𝑪 = (𝒌𝒅 × 𝒘𝒅 )(𝟏 − 𝑻𝒂𝒙) + (𝒌𝒆 × 𝒘𝒆 )

Based on the above formula and using weights of 17% and 83% for debt and equity
respectively, the WACC has been calculated below:

WACC
Weight of Debt 17.00%
After-Tax Cost of Debt 14.68%
Weight of Equity 83.00%
Cost of Equity 15.60%
WACC 15.44%

The cost of debt and equity calculations are explained as follows:

Cost of Debt
Long Term Debt (Secured) PKR 334,369.00
Interest Cost PKR 70,112.00
Before Tax Cost of Debt 20.97%
Tax Rate 30%
After Tax Cost Debt 14.68%

Cost of Equity
Dividend Per Share PKR 2.00
EPS PKR 3.53
Payout Ratio 56.66%
Net Income PKR 1,313,977,000.00
Shareholder Equity PKR 15,604,190,000.00
ROE 8.42%
Growth Rate 3.65%
Next Year Dividend PKR 2.07
Current Stock Price PKR 17.35
Cost of Equity 15.60%

Project’s Operating Cash Flows

Based on the estimated income and expenses, we have determined the 5 years’
operating cash flows as follows:

11
 Years
Details
1 2 3 4 5
Revenue
Units Sold 450 473 496 521 546.98
Sales Price PKR 277,000.00 PKR 288,080.00 PKR 299,603.20 PKR 311,587.33 PKR 324,050.82
Sale Revenue PKR 124,650,000.00 PKR 136,117,800.00 PKR 148,640,637.60 PKR 162,315,576.26 PKR 177,248,609.28
Cost of Goods Sold (Per Unit) PKR 236,667.00 PKR 243,767.01 PKR 251,080.02 PKR 258,612.42 PKR 266,370.79
Cost of Goods Sold Total PKR 106,500,150.00 PKR 115,179,912.23 PKR 124,567,075.07 PKR 134,719,291.69 PKR 145,698,913.96
Gross Profits PKR 18,149,850.00 PKR 20,937,887.78 PKR 24,073,562.53 PKR 27,596,284.57 PKR 31,549,695.31
Less: Operating Expenses
Electricity PKR 720,000.00 PKR 748,800.00 PKR 801,216.00 PKR 857,301.12 PKR 917,312.20
Telephone and Internet PKR 60,000.00 PKR 62,400.00 PKR 66,768.00 PKR 71,441.76 PKR 76,442.68
Advertising Expense PKR 480,000.00 PKR 499,200.00 PKR 534,144.00 PKR 571,534.08 PKR 611,541.47
Insurance Expense PKR 600,000.00 PKR 624,000.00 PKR 667,680.00 PKR 714,417.60 PKR 764,426.83
Fuel of Vehicles PKR 480,000.00 PKR 499,200.00 PKR 534,144.00 PKR 571,534.08 PKR 611,541.47
Salaries PKR 10,920,000.00 PKR 11,356,800.00 PKR 12,151,776.00 PKR 13,002,400.32 PKR 13,912,568.34
Water Charges PKR 60,000.00 PKR 62,400.00 PKR 66,768.00 PKR 71,441.76 PKR 76,442.68
Depreciation of Assets PKR 984,400.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00
Repairs and Maintenance PKR 480,000.00 PKR 499,200.00 PKR 534,144.00 PKR 571,534.08 PKR 611,541.47
Miscellaneous Expense PKR 600,000.00 PKR 624,000.00 PKR 667,680.00 PKR 714,417.60 PKR 764,426.83
Total Operating Expenses PKR 15,384,400.00 PKR 15,960,400.00 PKR 17,008,720.00 PKR 18,130,422.40 PKR 19,330,643.97
EBIT PKR 2,765,450.00 PKR 4,977,487.77 PKR 7,064,842.53 PKR 9,465,862.17 PKR 12,219,051.34
Less: Interest Expense (14.68%) $ - $ - $ - $ - $ -
Profit Before Taxes PKR 2,765,450.00 PKR 4,977,487.77 PKR 7,064,842.53 PKR 9,465,862.17 PKR 12,219,051.34
Less: Income Tax (30%) $ 829,635.00 $ 1,493,246.33 $ 2,119,452.76 $ 2,839,758.65 $ 3,665,715.40
Net Income After Tax PKR 3,595,085.00 PKR 3,484,241.44 PKR 4,945,389.77 PKR 6,626,103.52 PKR 8,553,335.94
Add: Depreciation Expense PKR 984,400.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00 PKR 984,400.00
Operating Cash Flows PKR 4,579,485.00 PKR 4,468,641.44 PKR 5,929,789.77 PKR 7,610,503.52 PKR 9,537,735.94

The key assumptions regarding the cash flows are listed as follows:

 Target sales will increase each year by 5%.

 Sales price per unit will increase by 4% and cost of one solution will also increase by
3%.
 All operating expenses with the exception of depreciation will increase by 4% in this
regard.
 Depreciation has been calculated on the basis of straight-line method.

Capital Budgeting Decisions

Now, we have calculated the NPV, IRR, Payback Period and the Profitability Index of
the project using a WACC of 15.44% and the results are listed as follows:

Capital Budgeting Decisions

WACC 15.44%
Payback Period 3.12
NPV PKR 3,747,840.72
IRR 25.05%
PI 1.23

Hence, as per decisions rules, following results can be drawn:

 The project has a payback period of 3.12 or 3 years and as per standard period (6-8
years) it is lower based on which the project is acceptable.
 NPV of the project is positive so, it is viable.
 IRR is greater than cost of capital based on which project should be accepted.

12
  The profitability index is greater than 1 based on which it is also acceptable.

The viability of the project has been tested on all four grounds which shows that projects
started by companies at such size and scale are viable and Pakgen should go for the
implementation of the project in this regard.

Recommendations
Based on the above analysis, following recommendations can be presented regarding the
viability of the solar power project and the capital structure of the selected company (Kabir,
2018):

 As the financials which we have calculated regarding the performance of the company
indicates that medium to small scale companies can easily start their new ventures in
the solar power industry.
 The government should provide subsidies to the emerging market of the solar industry
and production of PV panels at local level is needed to be commenced.
 The system of Net Metering is currently available in few cities and it is difficult to enter
in a net metering system. Hence, Government should need to simplify the system of net
metering in the due case.
 The retail network of solar panels and their accessories is needed to be expanded.
 The lower-middle class should be provided these solutions through a financing system
backed by banks just like car financing systems.
 A comprehensive awareness scheme is needed to be launched by the government
regarding the benefits of solar power.
 The business organizations engaged in solar power projects should be given tax
exemption so they manage their cost of capital.

Conclusion
Hence, from above discussion we have concluded that Pakgen Power Limited is able
to launch its new segment of business in an expansionary manner. We have gathered all the
necessary inputs regarding the project and then processed and analysed them through Microsoft
Excel in order to obtain the NPV, IRR, Payback Period and the Profitability Index and found
that all of the capital budgeting indicators are favourable. This study carries certain limitations
as well like due to market conditions, the estimations can affect as well like due to change in
interest and tax rates, the estimations of the five years can get effected as well.

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Dhiman, B. C. (2017). Micro Solar Energy Systems: Product Design Intervention Facilitating
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Finance Division. (2017). Overview of the Economy. Government of Pakistan.

Kabir, E. K. (2018). Solar energy: Potential and future prospects. Renewable and Sustainable
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Muhammad, F., Raza, S., K., & Khan, F. (2017). Different Solar Potential Co-Ordinates of
Pakistan. Innovative Energy and Research, 1-8.

Pakgen Power. (2017). ANNUAL REPORT . Lahore: Pakgen Power.

Pakgen Power. (2018, November 30). About Pakgen. Retrieved from Pakgen Power:
http://pakgenpower.com/company/about.php

SMEDA. (2017). Solar Power System An Introductory Guidebook. Lahore: SMEDA, Govt. of
Pakistan.

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