Amber Grid: Two Projects, One Budget
Amber Grid, a utilities company in Europe, has two capital projects competing for approval and only €185 M of approved capital this year.
Project A — Automation upgrade. Requires €90 M upfront and is expected to generate €22 M of incremental after-tax cash flow per year for 8 years.
Project B — New production line. Requires €218 M upfront and is expected to generate €74 M per year for 10 years.
The company's hurdle rate is 11%.
Two complications. First, the finance team has already spent €5 M on engineering studies for Project B, and the COO argues this money "shouldn't be wasted". Second, Project B's cash flows depend on a customer contract that is signed but renews annually.
project a
- life years
- 8
- investment m
- 90
- annual cash flow m
- 22
project b
- life years
- 10
- investment m
- 218
- annual cash flow m
- 74
constraints
- hurdle rate pct
- 11
- capital budget m
- 185
- already spent on b studies m
- 5
Recommend how to allocate the capital budget. Provide:
- Analysis — NPV, IRR and payback for each project.
- Risks — including how you treat the engineering spend and the contract renewal risk.
- Recommendation — which project (or projects) to fund.
100 points, 60% to pass.
- assumptions20
- recommendation30
- risk assessment20
- financial analysis30
Reveal suggested structure
- NPV of each project using the annuity form: NPV = CF × [(1 − (1+r)^−n) ÷ r] − I₀
- IRR — the rate at which NPV = 0. Note that IRR alone misranks projects of different scale.
- Payback as a liquidity check, not a decision rule.
- Sunk cost — the €5 M is spent and irrecoverable. It must not enter the decision.
- Profitability index (NPV ÷ investment) when capital is rationed.
- Risk-adjust Project B for the annual renewal.