Bharat Solar Power Ltd. — AFM by CA Nikhil Monga

Bharat Solar Power Ltd. (BSPL) is evaluating an investment proposal to install a rooftop solar power system for an industrial client on a 4-year contract basis. The financial details of the proposal are as follows:

Initial Capital Outlay: ₹100 Lakhs
Project Life: 4 years
Salvage Value at Year 4: ₹10 Lakhs (contractually guaranteed / risk-free)
Depreciation: Straight-Line Method (SLM) over 4 years down to the salvage value
Annual Earnings Before Depreciation and Tax (EBDT): ₹45 Lakhs per annum for Years 1 to 4
Applicable Tax Rate: 30%
Risk-Free Rate (Rf): 6% p.a.
Risk-Adjusted Discount Rate (RADR): 10% p.a.

The management is considering both the Risk-Adjusted Discount Rate (RADR) method and the Certainty Equivalent (CE) Approach to incorporate project risk into the evaluation.

The estimated Certainty Equivalent Coefficients for the annual operating cash inflows are:
Year 1: 0.95
Year 2: 0.90
Year 3: 0.85
Year 4: 0.80