CASE STUDY (QUESTION 1) [40 Marks] A power utility has noted that the demand of electricity in their service area has continued to increase while the country and region has continued to be faced with an electrical energy supply problem due to ageing thermal power plants and incessant and prolonged drought periods. The lead times for construction of new thermal plants is usually more than 10 years and the utility through its transmission and distribution planning division has identified energy efficiency as a short-term and low-hanging fruit in their quest to balance their supply and demand. The utility has another different and dedicated division whose mandate is to develop the utility's projects from project idea, concept up to feasibility studies and the division is guided by the project funnel philosophy (concept) in project development. The utility has decided to be innovative and deploy smart metering systems, with enhanced demand response features, in their distribution network. A 6-year pilot project has been formulated by the technical manager for the consideration by the Management of the utility. The initial outlay of the project are forecasted as shown on Table 1: Table 1: Cash Outlay Description Amount (US$) Conceptualisation and Feasibility studies of all Utility Projects 20,000.00 Software requirement in year 0 100,000.00 Software requirement in year 1 75,000.00 New equipment, installation and commissioning cost in year 0 148,000.00 It is planned that the engineering, construction and commissioning work for the pilot project will take 12 months and the pilot project will be launched in one year's time. The utility considers this innovative project as a win-win project for both the utility and their customers as it envisaged to improve their energy efficiency. The net cash inflow forecast (arising from a forecast of reduction of energy import) of forecast for the pilot project are as shown on Table 2: The net cash inflow forecast (arising from a forecast of reduction of energy import) of forecast for the pilot project are as shown on Table 2: Table 2 Net Cash Inflow Description Amount (USS) Net cash inflow year 2 184,000.00 Net cash inflow year 3 159,000.00 Net cash inflow year 4108,000.00 Net cash inflow year 5 96,000.00 Net cash inflow year 6 40,000.00 After 6 years the pilot project will come to an end and it is expected that the installed system will be upgraded to the latest technology if the pilot project has a positive evaluation at that stage. Due to fast developments taking place in the Information and Communication Technologies (ICTs) it is expected that the equipment used in the pilot project will be obsolete and it will not have any residual value at the end of the pilot project. As an engineering student who is attached to the utility for your Work Integrated Learning (WIL) course, you offer to appraise the project on behalf of the technical manager at the utility. The technical manager has specifically emphasised that s/he wants the appraisal to show how fast the project may payback. You have also suggested, during the meeting with the technical manager, that simple payback period is not a good financial evaluation method for such a project. The utility evaluated the cost of capital for this new project as 119. (a) Calculate the simple payback period for the project. Explain your result. [10 Marks] (b) Calculate the Net Present Value (N.P.V) for the project. Explain your result. | 10 Marks] (c) Briefly outline arguments why the N.P.V is a better investment appraisal method to the simple payback period. [6 Marks) (d) Briefly, explain how the method in (a) may be improved upon. [4 Marks] le) Deploy the method you have explain in (d) for the financial evaluation of the project. Explain your result. [ 10 Marks)