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Financial Modeling and Analysis
of a 10 MW Wind Power Project
Introduction
The project report titled "Financial Modeling and Analysis" aims to study the different financial ratios and their interpretation for a 10 MW Wind Power Project in Porbandar, Gujarat. The report was prepared as part of a summer internship program for the Master of Business Administration (MBA) degree at Gautam Buddha University.
Organization Overview
Vardhan Consulting Engineers (VCE) is a consulting company founded by a group of engineers with strong academic backgrounds and decades of management experience. VCE provides solutions to complex engineering, management, and financial issues for its clients. The company's services include:
Feasibility Analysis, Detailed Project Report, and Financial Analysis Financial Closure through Debt or Private Equity for Project Finance On-site and Off-site Project Management and EPC-Management Services Documentation and Transaction Services for Sale of Projects Project Development and Transfer of Rights at NTP
VCE has diverse business horizons and revenue sources, such as Engineering and Management Consulting, Importing and Branding Pearl Jewellery, Stock Market and Cross-Currency Trading, and Insurance and Investment Advisory.
Purpose of the Organization
VCE believes in giving back to society and has initiated various programs to support the community. These include:
Vardhan Merit Scholarship: VCE provides scholarships to underprivileged girls to cover their entire educational expenses until 12th grade, ensuring that financial burden never becomes a reason for them to drop out of school.
VCE Internships and Training: VCE selects students from various engineering and management colleges and provides them with unique internships and training, especially for the core engineering and finance management sectors, to prepare them for the corporate/ industry.
VCE believes in "Society Pay Back" and provides these scholarships, internships, and training programs free of cost to deserving students. This is not just a Corporate Social Responsibility (CSR) activity, but also a way for VCE to enhance the skills of young core engineering graduates and management students, who are in high demand in the industry.
Objectives of the Study
The objectives of the project are:
To study the concept of Finance. To study the function of revenue, cost, and debt sheet of the financial model. To find out the various steps involved in the finance flows sheet. To provide support services to the medium and small-scale sectors. To streamline the system within the Company for settlement of commercial disputes.
Research Methodology
The project involved the collection of both primary and secondary data. Primary data was gathered through discussions with various staff members of the organization, while secondary data was obtained from the financial statements of the company.
Theoretical Background of the Study
Ratio analysis is a major component of financial analysis and is used to make constructive decisions for the future prospects of a company. Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements to interpret the financial condition and performance of a firm.
Data Analysis and Interpretation
The project report focuses on the financial modeling and analysis of a 10 MW Wind Power Project in Porbandar, Gujarat. The analysis includes the study of various financial ratios, revenue, cost, and debt sheets, as well as the finance flows sheet of the project.
Conclusion
The project report provides a comprehensive study of the financial modeling and analysis of the 10 MW Wind Power Project in Porbandar, Gujarat. The report covers the organization overview, purpose, objectives, research methodology, and theoretical background of the study, as well as the detailed data analysis and interpretation.
Utility of Finance Project Report
The major classes of finance information users are current and prospective investors, employees, shareholders, clients, governments, and their intermediaries. All these information seekers are completely dependent on financial reports to assist their decision-making process. Investors provide risk capital to the enterprise, and every financial project report must satisfy their requirements. Common to all these information seekers is their curiosity in the capacity of an enterprise to produce funds and funds equivalents, besides the time and assurance of anticipated fund flows. Finance project reports describe the financial effects of past occurrences and deals that most information seekers need to associate with future events. Finance project reports offer only a limited amount of non-financial data required by the seekers of financial statements.
Research Methodology: 10-MW Wind Power
Project in Porbandar
Wind Power: A Viable Alternative Energy Source
Wind power is one of the few viable sources of alternative energy available to homeowners today, especially in areas with regular high wind seasons. It's important to consider not just the natural circumstances affecting the wind turbine's power generating abilities, but also the technical aspects involved.
Power Rating of Wind Turbines
One of the most important characteristics to look out for in a wind turbine is its power rating, usually measured in kilowatts (kW). Small wind turbines, sometimes referred to as home wind turbines, are much smaller than the turbines used on wind farms, typically up to 10 meters wide. Due to the smaller blades, these wind turbines have a much smaller power output than large turbines, making them suitable for projects with smaller electricity needs, such as residential, portable, or off-grid applications.
Optimal Locations for Small Wind Turbines
The best locations for small wind turbines are places that experience frequent, high wind speeds. Generally, the taller the turbine, the windier the environment and the more electricity it's capable of generating.
Most of the best spots for small wind turbines are on rural properties, as they tend to have a lot of space and few obstructions that would impact wind speeds.
Electricity Generation Potential of Wind Turbines
Industry experts estimate that a 10kW wind turbine energy system has the potential to produce up to 10,000 kWh worth of energy per year, but this is based on the turbine operating under favorable conditions. The reality is that there will be days, weeks, and even months where there isn't enough wind for the turbine to produce this amount of energy. The best way to calculate how much electricity a wind turbine can produce is to multiply the air density with the mechanical efficiency of the turbine, and then multiply the answer by the length of the rotor blade and the speed of the wind.
Factors Affecting Wind Turbine Electricity Production
Wind speed is one of the most fundamental determining factors in how much power a wind turbine can produce. The U.S. Department of Energy provides information on the average annual wind speed at 50 meters above the ground, which is an important consideration. Altitude is another factor, as a wind turbine placed on a 100-foot tower will produce 30% more energy than one placed on a 60-foot tower. Obstructions around or near the turbine, such as trees or other structures, can also impact the wind speed and energy generation.
Wind Turbine Costs
Home or farm-scale wind turbines under 100 kilowatts cost roughly $3,000 to $8,000 per kilowatt of capacity, with a 10 kilowatt machine costing $50,000-$80,000 or more. Utility-scale wind turbines range from about $1.3 million to $2.2 million per MW of nameplate capacity installed, with most commercial-scale turbines being 2 MW in size and costing roughly $3-$4 million installed. The total costs for installing a wind turbine can vary significantly depending on factors such as the number of turbines, cost of financing, location, and other project-specific considerations.
Financial Modeling
Financial modeling is a tool built in spreadsheet software, such as MS Excel, to forecast a business' financial performance into the future. The forecast is typically based on the company's historical performance and assumptions about the future, requiring the preparation of an income statement, balance sheet, cash flow statement, and supporting schedules.
used for the purpose of decision making and financial analysis. The applications mainly include:
Business valuation, particularly discounted cash flow, but counting other valuation problems. Management decision making and scenario planning (like "what is", "what if", "what has to be done", and similar more. Cost of capital Capital budgeting Project finance Financial statement analysis
Why is financial modeling important?
Financial modeling acts as a useful tool which enables business options and risks to be estimated in a cost-effective way against various assumptions, recognize optimal solutions in estimating financial returns and understand the effect of resource constraints thus leading to more effective business decisions. Financial modeling can be referred as an art and like any other art form, it requires constant practice and commitment to develop expertise in this area.
In the present day world, many companies are becoming globally integrated with the international economy through the way of acquiring/establishing international operations. This calls for the requirement of strong financial models which can assist in performing the evaluation of every country's operations, reflect on multiple currencies in their model, estimate varying capacity utilizations to estimate the optimal capacity under changeable industry demand-supply scenarios and similar more cases.
Introduction to 3-statement modeling
An integrated 3-statement financial model is a type of model that forecasts a company's income statement, balance sheet and cash flow statement. While accounting enables us to understand a company's historical financial statements, forecasting those financial statements enables us to explore how a company will perform under a variety of different assumptions and visualize how a company's operating decisions (i.e. "let's reduce prices"), investing decisions (i.e. "let's buy an additional machine") and financing decisions (i.e. "let's borrow a bit more") all interact to impact the bottom line in the future.
A well-built 3-statement financial model helps insiders (corporate development professionals, FP&A professionals) and outsiders (institutional investors, sell side equity research, investment bankers and private equity) see how the various activities of a firm work together, making it easier to see how decisions impact the overall performance of a business.
Formatting a 3-statement model
It is critical that a complex financial model like the 3-statement model adheres to a consistent set of best practices. This makes both the task of modeling and auditing other people's models far more transparent and useful.
Periodicity
One of the first decisions to make in a 3-statement model concerns the periodicity of the model. Namely, what are the shortest time periods the model will be partitioned into: annual, quarterly, monthly or weekly. This will typically be determined by the 3-statement financial model's purpose.
Model structure
When models get large, adhering to a strict structure is critical. Key rules of thumb include:
Use roll-forward schedules when forecasting balance sheet items. Aggregate inputs in one worksheet or one section of the model and separate them from calculations and outputs. Avoid linking files together.
The core elements of a 3-statement model are the income statement, balance sheet and cash flow statement. A key feature of an effective model is that it is "integrated," which simply means that the 3-statement models are modeled in a way that accurately captures the relationship and inter- linkages of the various line items across the financial statements.
The income statement
The income statement illustrates a company's profitability. All three statements are presented from left to right, with at least 3 years of historical results present in order to provide historical rations and growth rates from which forecasts are based. Inputting the historical income statement data is the first step in building a 3-statement financial model. Forecasting typically begins with a revenue forecast followed by the forecasting of various expenses.
The balance sheet
Unlike the income statement, which shows operating results over a period of time (a year or a quarter), the balance sheet is a snapshot of the company at the end of the reporting period. The balance sheet shows the company's resources (assets) and funding for those resources (liabilities and shareholder's equity). Inputting historical balance sheet data is similar to inputting data in the income statement. The balance sheet is driven by the operating assumptions made on the income statement.
Keep formulas simple and break down complex calculations into steps Ensure you know how to use the most important Excel formulas and functions Use INDEX and MATCH instead of VLOOKUP to query data
Use the CHOOSE function to build scenarios
Formatting:
Clearly distinguish between inputs (assumptions) and output (calculations)
Structure the financial model in a logical and easy to follow design
Model structure:
Build the whole model on one worksheet and use grouping to create different sections Include the following main sections: Assumptions and drivers, Income statement, Balance sheet, Cash flow statement, Supporting schedules, Valuation, Sensitivity analysis, Charts and graphs
How do you build a financial model?
Financial modeling is an iterative process. The key steps include:
Historical results and assumptions: Pull three years of financial statements and input them into Excel
Financial Modeling: A Comprehensive
Approach
Reverse Engineering Assumptions
To begin the financial modeling process, you need to reverse engineer the assumptions for the historical period. This involves calculating various metrics such as:
Revenue growth rate Gross margins Variable costs Fixed costs Accounts payable (AP) days Inventory days Accounts receivable (AR) days
These assumptions will form the foundation for the financial projections.
Building the Income Statement
With the forecast assumptions in place, you can start building the income statement. This includes calculating the following:
Revenue Cost of Goods Sold (COGS) Gross profit Operating expenses EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
The remaining items, such as depreciation, amortization, interest, and taxes, will be calculated later.
Constructing the Balance Sheet
After completing the top of the income statement, you can begin filling in the balance sheet. This involves calculating:
Accounts receivable (based on revenue and AR days) Inventory (based on COGS and inventory days) Accounts payable (based on COGS and AP days)
Creating Supporting Schedules
Before finalizing the income statement and balance sheet, you need to create supporting schedules for:
Property, Plant, and Equipment (PP&E) Debt and interest
The PP&E schedule will incorporate historical data, capital expenditures, and depreciation. The debt schedule will include historical data, new debt, and debt repayments. Interest expense will be calculated based on the average debt balance.
Completing the Financial Statements
With the supporting schedules in place, you can now finalize the income statement and balance sheet:
On the income statement, link depreciation to the PP&E schedule and interest to the debt schedule. Calculate earnings before tax, taxes, and net income. On the balance sheet, link the closing PP&E and debt balances from the respective schedules. Shareholder's equity can be completed by pulling forward the previous year's closing balance, adding net income and capital raised, and subtracting dividends or shares repurchased.
integral part of financial statement analysis. These ratios are categorized based on the financial aspect of the business they measure.
Profitability Ratios
Profitability ratios use margin analysis to show the return on sales and capital employed. Examples include:
Gross Profit Ratio : Indicates the relationship between production cost and sales, and the efficiency of production or purchasing. Net Profit Ratio : Represents the net profit as a percentage of sales, showing the portion of sales available to the owners after all expenses and costs. Rate of Return Ratio (ROR) or Overall Profitability Ratio : Considered the most important ratios by some accountants and analysts, as they indicate if the management is performing their duties properly. This includes: Return on Assets (ROA) : Shows the profitability of investment in the firm, with a higher ratio being more desirable. Return on Equity (ROE) : A crucial ratio from the shareholders' perspective, with a declining ratio indicating problems in the company's financial position.
Liquidity Ratios
Liquidity ratios measure the availability of cash to pay debt, providing a picture of the company's short-term financial situation. Examples include:
Current Ratio : Measures the solvency of the company in the short term, with a ratio of 2:1 indicating a highly solvent position. Quick Ratio : Indicates the backing available to liquid liabilities in the form of liquid assets, with a ratio of 1:1 being considered standard and ideal.
Debt-Equity Ratio (Solvency or Gearing Ratios)
These ratios measure the percentage of capital employed that is financed by debt and long-term finance. The lower the gearing ratio, the higher the dependence on equity financing. A high debt-equity ratio indicates that the investment of creditors is more than that of the owners.
Turnover Ratios (Activity Group Ratios)
These ratios indicate the efficiency of the organization in converting various assets into sales. Examples include:
Fixed Assets Turnover Ratio : Measures the level of sales generated due to investment in fixed assets, with a higher ratio implying more intensive use of fixed assets.
Current Assets Turnover Ratio : Indicates the efficiency with which current assets are turned into sales, with a higher ratio implying more efficient use of funds. Working Capital Turnover Ratio : Reflects the capability of the organization to achieve maximum sales with the minimum investment in working capital. Capital Employed Turnover Ratio : Measures the investment required for the business to function, with a higher ratio indicating more efficient use of capital.
Which Ratio for Whom?
Different groups of stakeholders have different needs and interests, and thus require different ratios to assess the company's performance.
Investors : They need to determine whether to buy, hold, or sell shares, and assess the company's ability to pay dividends. The Return on Capital Employed Ratio is most relevant for this group.
Lenders : They want to ensure that their loans and interests will be paid on time, and thus focus on the company's stability and liquidity ratios.
Managers : They need segmental and total information to understand the company's overall performance, which can be provided by the Profitability Ratios.
Employees : They are concerned about the company's ability to provide remuneration, retirement benefits, and employment opportunities, which can be assessed using the Return on Capital Employed Ratio.
Suppliers and Trade Creditors : They want to ensure that their customers can pay them back, and thus focus on the company's Liquidity Ratios.
Customers : They are interested in the company's Profitability Ratios to assess the long-term viability of their business relationship.
Governments and Agencies : They are concerned with the allocation of resources and the activities of businesses, and thus calculate the Profitability Ratios to regulate and determine taxation policies.
Local Community : They are interested in the company's trends and recent developments, and thus require a wide range of ratios.
Financial Analysts : They need to know various accounting concepts and details, and thus are interested in possibly all the ratios.
Researchers : Their demands cover a wide range of statistical and qualitative analyses, depending on the nature of their research.
The total wind installed capacity in Tamil Nadu is 7,633 MW, and during the fiscal year 2014–15, the electricity generation was 9.521 GWh, with about a 15% capacity utilization factor.
Maharashtra
Maharashtra is one of the prominent states that have installed wind power projects, second only to Tamil Nadu in India. As of the end of March 2016, the installed wind power capacity in Maharashtra was 4,655.25 MW. There are 50 developers registered with the state nodal agency 'Maharashtra Energy Development Agency' for the development of wind power projects. All the major manufacturers of wind turbines, including Renew Power, Suzlon, Vestas, Gamesa, Regen, and Leitner Shriram, have a presence in Maharashtra.
Gujarat
The Gujarat government's focus on tapping renewable energy has led to a sharp rise in the wind power capacity in the last few years. According to official data, the wind power generation capacity in the state has increased tenfold in the last six years. Gujarat accounts for 16% of the total wind power capacity of the country. ONGC Ltd. has installed a 51MW wind energy farm at Bhuj in Gujarat. Renewable energy projects worth a massive Rs 1 lakh crore of memorandums of understanding (MoUs) were signed in the Vibrant Gujarat Summit in 2017.
Rajasthan
Rajasthan has installed a 4298 MW wind power plant.
Madhya Pradesh
The Government of Madhya Pradesh has sanctioned another 15 MW project to Madhya Pradesh Windfarms Ltd. (MPWL) in Bhopal at Nagda Hills near Dewas under consultation from Consolidated Energy Consultants Ltd. (CECL) Bhopal. All 25 wind energy generators (WEGs) have been commissioned on 31.03.2008 and are under successful operation.
Kerala
Kerala has installed 55 MW of wind power production. The first wind farm of the state was set up in 1997 at Kanjikode in Palakkad district. The agency has identified 16 sites for setting up wind farms through private developers.
Odisha
Odisha, a coastal state, has a higher potential for wind energy. The current installation capacity stands at 2.0 MW. Odisha has a wind power potential of 1700MW. The Government of Odisha is actively pursuing to boost wind power generation in the state, but it has not progressed like other states primarily because Odisha has a huge coal reserve and a number of existing and upcoming thermal power plants, making it a power-surplus state.
West Bengal
The total wind power installation in West Bengal is 2.10 MW until December 2009 at Fraserganj, District- South 24 Paraganas. An additional 0.5 MW (approximately) has been installed at Ganga Sagar, Kakdwip, District - South 24 Paraganas. Both the projects are owned by the West Bengal Renewable Energy Development Agency (WBREDA), Government of West Bengal, and the projects were executed on a turnkey basis by Utility Powertech Limited (UPL).
Kashmir
The union territory of Ladakh and its Kargil district are potential wind energy areas, which are yet to be exploited. Wind speeds are higher during the winter months in Ladakh, which is complementary to the hydro power available during the summer months from the snow melt water. Being a Himalayan region located at a higher altitude, the heating energy requirements are high, which can be met by the renewable energy resources such as wind, solar, and hydro power. The union territory is yet to open its account in grid-connected wind power installations.
India's Largest Wind Power Production Facilities (10MW
and Greater)
The table below lists the top 35 wind power plants in India with a capacity of 10MW or greater:
| Rank | Power Plant | Producer | Location | State | MWe | | --- | --- | --- | --- | --- | --- | | 1 | Jaisalmer Wind Park | Suzlon Energy | Jaisalmer | Rajasthan | 1064 | | 2 | Muppandal Wind Farm | Muppandal Wind | Kanyakumari | Tamil Nadu | 1500 | | 3 | Brahmanvel windfarm | Parakh Agro Industries | Dhule | Maharashtra | 528 | | 4 | Kayathar | Siemens Gamesa, ReNew Power | Tutcorin | Tamilnadu | 300 | | 5 | Dhalgaon windfarm | Gadre Marine Exports | Sangli | Maharashtra | 278 | | 6 | Vankusawade Wind Park | Suzlon Energy Ltd. | Satara District | Maharashtra | 259 | | 7 | Vaspet | ReNew Power | Vaspet | Maharashtra | 144 | | 8 | Tuljapur | Siemens Gamesa, ReNew Power | Osmanabad | Maharashtra | 126 | | 9 | Beluguppa Wind Park | Orange Renewable | Beluguppa | Andhra Pradesh | 100.8 | | 10 | Mamatkheda Wind Park | Orange Renewable | Mamatkheda | Madhya Pradesh | 100.5 | | 11 | Anantapur Wind Park | Orange Renewable | Nimbagallu | Andhra Pradesh | 100 | | 12 | Damanjodi Wind Power Plant | Suzlon Energy Ltd. | Damanjodi |
has been authorized as the Nodal Ministry for the use of offshore areas within the Exclusive Economic Zone.
India seems to be pacing up rapidly towards offshore wind energy development as the Nodal Ministry (MNRE) & Nodal Agency (NIWE) have called for the Expression of Interest (EoI) inviting the bidders for the development of the first 1000MW commercial-scale offshore windfarm in India, near the coast of Gujarat. The wind measurements and other data collection are under progress under the supervision of NIWE.
