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CASE ANALYSIS

1. The issue recognized in the case is, Should CWDL renegotiate the water sale price with CMWSSB? 2. First we need the IRR of the project in the base case i.e. scenario before the increase in the cost due to delay. For the IRR we need the WACC, and for the WACC we need the Cost of Debt & Cost of Equity. 3. The Cost of Debt is taken as the average Prime lending rate of Banks in India taken from Reuters. The Cost of Equity is calculated using the CAPM Model. 4. Beta is not given anywhere in the case. So we can pick up a comparable company stock and using its Beta we can find the Beta for CWDL. 5. We took Hindustan Construction Ltd. (HCC) as the comparable company because it takes up projects in water infrastructure similar to CWDL. We have taken its monthly stock prices from Jan01 to Sep05 in the Bombay stock exchange and taken BSE Index for the market price in the same period. (Excel Sheet : Beta) 6. Get the Levered Beta = Cov(i,m)/Var(m). Unlever it using the average Debt-Equity ratio of Mar02 to Mar05. 7. For Cost of Equity we would need the Risk Free Rate & Risk Premium which is taken from a working paper of IIM Ahmedabad. http://www.iimahd.ernet.in/~jrvarma/papers/WP2006-06-04.pdf 8. Lever the unlevered Beta of HCC with the Debt structure of CWDL and find Cost of Equity as Ke = Rf + BCWDL x ( Risk Premium) 9. WACC can now be directly calculated as we got cost of Equity and Cost of Debt which comes out to be 16.01% (Excel Sheet: WACC Originally) 10. Risk Modeling is to be done in the base case using the data provided in the case on cyclone frequency and using 90% capacity utilization. 11. The cyclonic risk is modeled by modeling it in the cash flows in terms of man days lost and thus resulting in loss of revenue for the days lost as per the data available on a similar incident happening in Oman where the desalination plant was shut down for 5 days due to cyclone Gonu. http://www.foxnews.com/story/0,2933,280052,00.html 12. The capacity utilization was modeled to 90% as most of the desalination plants usually run at 90% of capacity. 13. The IRR of the project fell from 47.43% to 43.61% on adding these models to the cash flows. 14. Modeling of cash flows due to delay in the setting up of plant which was because of the Cyclone Nisha is to be done. This modeling takes into account that the cash flows start from 2010 unlike 2008 in the base case.

15. The IRR of the project fell to 30.48% from 47.43%. The important point to note here is the relative drop in the IRR of the project as the actual methods employed by CWDL to find out the cash flows may be different. 16. Modeling of cash flows after the delay due to Cyclone Nisha and after taking into account the cyclonic risks in the cash flows is also to be carried out. 17. This reduces the IRR of the project to 28.51% from 47.31% originally and 30.48% in point (15). 18. The optimal Weighted Average Cost of Capital (WACC) was also calculated in which it was found out that the WACC was minimum for a debt ratio of around 15-20% at around 13.46%. 19. In conclusion, we recommend that CWDL should go for restructuring of its capital structure and also renegotiate the water sale price with CMWSSB in order to get the IRR of the project back to its original value.

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