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Feasibility Study: Case of a Biomass Project*

CASE STUDY, FINANCIAL MANAGEMENT
ET Cases - FLAME, 8 Pages
AUTHOR(S) : Dr. Monika Chopra, Senior Assistant Professor, Lal Bahadur Shastri Institute of Management, Dr. Manisha Singh, Faculty, IBS, Bangalore

Case Preview

Feasibility Study: Case of a Biomass Project

 

After the final approval from the board, it will release the funds, so it’s a big step, may be even the biggest. It’s not just a rubber-stamp process; the board will look very carefully at the feasibility study prior to making a decision.

– Kimball Hansen


ISGEC Heavy Engineering Ltd., a diversified global engineering company based in India was established in 1933. It was a INR2434 crore multi-product, multi-location public company providing engineering products to customers across 76 countries. It had been ranked 309 in the ET500 listing, 329 in the Fortune India 500 listing and also ranked at No. 198 (Standalone net sales rank) in the Business Standard BS1000 companies list released in March 2012.

The company operated with the following business units – Process Equipment, EPC Power Plants, Boilers, Sugar Plants & Machinery, Mechanical & Hydraulic Presses, Steel & Iron Castings, Contract Manufacturing, and Trading.

The major target sectors for the company were Power, Oil & Gas, Automobiles, Fertilizers, Sugar and Defense. With a team of over 4000 employees, including 700 qualified engineers and over 450 designers, the company had its manufacturing plants and design offices spread across India in Haryana, Uttar Pradesh, Gujarat, Tamil Nadu and Maharashtra................

New Project

In 2013, the company had a proposal of a Project to install 1220 TPH, 109 bar (g), 540 +/- 5 degree Celsius Bagasse/ Coal fired Traveling Grate Boiler for customer: M/s Biomass Energy, S.A, Guatemala at their site at Guatemala.

Salient features of the contract were as follows:

• The contract was signed on November 29th 2013.
• The contract price was $361904 (Three Lakhs Sixty One Thousand Nine Hundred Four Dollars) approx. INR2.60 crore @ $1 = INR56.93) on CIF Guatemala Port (Puerto Quetzal) Basis.
• Time schedule for Completion of shipment was within 15 months from the effective date of contract i.e., completion of shipments by February 2015 on CIF Guatemala (Puerto Quetzal) basis.

.......................

Technical Specification of the Project

..............................................

1. Codes and standards: The design, manufacture, testing and performance of the conveyors were to comply with the requirement of applicable International/ Other recognized standards.
2. Control Philosophy for the system:
All necessary interlocks and sequences as required for power plant was to be generated through Purchase’s DCS.

.....................

Evaluation of Project Investments

The project manager used Discounting Criteria to evaluate returns from project investments. The corporate borrowing cost in India during 2013-14 was around 8%, risk free rate on 91day. T bills was 6% (source RBI) while the cost of equity was 15.28% (risk premium 9.28%)...........

Factors driving Power Plant Costs:

The major factors determining the costs of building and operating power plants included:..................

Environmental Control Technology

To comply with multiple EPA regulations, ISGEC planned to install following controls for sulfur dioxide (SO2), nitrogen oxide (NOx), mercury and other hazardous air pollutants:

• A dry flue gas desulfurization system (DFGD), commonly known as a scrubber, reduced sulfur dioxide emissions
• Fabric filter (FF), commonly known as a baghouse2, could physically trap and filter particulate matter
• .............

Experience where it Counted

The company’s services ranged from global, corporate-level systems to multiple facility projects to local, facility-level programs and included industrial hygiene, audits and assessments, integrated EH&S management systems, outsourcing, and other comprehensive sustainability services................

Assignment Questions

I. Should ISGEC go ahead with the project on the basis of feasibility report?
II. ...............

Exhibits

Exhibit I: Electric Power Consumption in Guatemala (in Kwh)

Exhibit II: Investment cost of the Project

Exhibit III: Cash Flows from Biomass Project

Exhibit IV: Other Financials (in INR crore)

Teaching Note Preview

Feasibility Study: Case of a Biomass Project

 

Synopsis

The case brings out a problem of feasibility analysis for an electric power generation project. It presents information of a company ISGEC heavy engineering limited which plans to set up an electric power generation plant in Guatemala. Before that the company wishes to conduct a feasibility study in order to establish the viability of the project. The case presents all information related to demand and supply of electricity in Guatemala for past few years, market share of various competitors, technical specifications, projected cash flows, economic factors etc. It brings out the details of these areas and other information to be segregated for proper understanding of feasibility analysis.

Teaching Plan

The discussion should be on the following aspects of feasibility study of a project:

a) Development objectives to which the project conforms
b) Detailed project objectives and government policy
c) Analysis of market demand and technical soundness of the project
d) Operational viability of the project
e) The economic and financial feasibility of the project proposal
f ) Analysis of other legal and environmental issues

The students would be advised to complete the background reading before the case is introduced. Evaluation would include: MCQ, Case reading and analysis, and Assignment Questions...............

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Abstract

The case highlights the process of feasibility analysis for a Biomass electric power generation project. The case provides details of the project taken up by a company ISGEC heavy engineering limited. The project was to set up an electric power generation plant in Guatemala. Before selecting the project, the company carried out a feasibility study in order to establish the viability of the project. The company conducted various kinds of analysis viz. market, technical, environmental, economic and financial feasibility in order to determine whether to take up the project or not. Market analysis involved study of demand and supply of electricity generation in Gautemala along with the discussion of major competitors in the sector. Technical specifications of the project were detailed along with which the cash inflows expected from the project were also mentioned. Finally, the case details the government incentives, and environment control technology developed as a part of the project.


Pedagogical Objective

  • To understand various aspects involved in project feasibility viz. market, technical, economic and financial feasibility

Case Positioning and Setting
The case can be used in the course of Project planning, financing and control as well as in corporate finance as a part of Capital Budgeting for students of MBA, B.Com and BBA


* FLAME INTERNATIONAL CASE CONFERENCE 2016

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- Abstract
- Case Study
- Teaching Note (**ONLY for Academicians)
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