**This case is intented for user Abhishek Jain, since we agreed on it because it is a resit case. Others are welcome to solve it if Abhishek Jain cant help me. thank you.**

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Your consultancy work with CSR in case 1 has spread positive word of mouth for your business. As a consequence hereof, the company Electricity Conservation ltd has requested you to help them analyze which of two mutually exclusive projects to invest in. Below follow information about the two investment opportunities:

Investment A (the development of a decentralized heating system for buildings)

Â· The initial cost for this investment is $1million

Â· The yearly expenses for this investment is expected to be $10 000 (at the end of each year).

Â· The investment is expected to generate revenues of $200 000 per year (at the end of each year) for the next 10 years.

Â· The cost of capital for this investment project is expected to be 10%

Investment B (the development of a centralized heating system for buildings)

Â· The initial cost for this investment is $0.5million

Â· The yearly expenses for this investment is expected to be $7 000

Â· The investment is expected to generate revenues of $175 000 per year (at the end of each year) for the next 10 years.

Â· The cost of capital for this investment project is expected to be 8%

Investment C (the development of a manual heating system for buildings)

Â· The initial cost for this investment is $0.2million

Â· The yearly expenses for this investment is expected to be $5 000

Â· The investment is expected to generate revenues of $80 000 per year (at the end of each year) for the next 10 years.

Â· The cost of capital for this investment project is expected to be 7%.

Your task

Your task is to create a spreadsheet model (using Microsoft Excel) showing which investment to undertake. The client more specifically wants you to show the following in your spreadsheet model:

a) Show, by using the incremental IRR rule for investment A and B above, in a graph, how sensitive the choice of one project over the other is to changes in discount rate of either project. (NPV on Y-axis, discount rate on x-axis).

b) Now assume that Electricity Conservation ltd. has in total 20 scientists available to develop either of the three heating systems (investments A, B or C). However, the company has just realized they can bundle each of the three heating systems for a single building (customization). For instance, for a single building they can develop a solution 20% based on a manual heating system, 30% on a centrally based one and 50% of a decentralized one. Developing the complete manual system (investment C) requires using 12 scientists for a year, developing the complete centralized system requires using 8 scientists for a year, and finally developing the complete decentralized system requires using all 20 scientists for a year. Based on number of scientists (and assume scientists are divisible in fractions and over the year) as a resource constraint develop a profitability index (using NPV) to show whether the company ought to invest in either investment A, investment B, investment C or a combination of them (A,B,C). hence, which alternative yields highest value in terms of NPV?

c) Now assume that investments A, B and C are mutually exclusive. Hence, you choose either of them. Assume that for investment C a real option has arisen. If the economy turns out to be good (25% probability) you will be able to generate revenues equal to$150 000 per year from year 2016 and onwards. If the economy turns out to be bad, then the opportunity will not be given. All else equal, according to the NPV rule should Electricity Conservation ltd now choose investment project C or not?

Finally, since the company wants to be able to use this spreadsheet in the future as well you need to use cell references in the formulas (for a, b and c above).