AES Corporation Expansion Plan in Brazil Case Study Solution
Background
The energy market of Brazil is the eighth-largest energy consumer market in the world. The Brazil government has strict control over this sector and plays a crucial role in keeping the lights on in the country. To reward the efficiency in hydroelectric, biomass, wind power, small hydro power and bio diesel generation government established an auction tool. According to this auction tool, three auctions are held in a year.
There are four types of auction:open with ascending price, open with descending price, closed first-price sealed-envelope bid and sealed second price bid. The winner of the auction receives long-term contract to cover electricity demand.
AES Corporation holds 16% economic interest in Electro Paulo a publically listed firm and the is largest power distributor in the country.Furthermore, it holds 24% economic interest in Tiete which is the third largest generator in Brazil. Tiete uses hydroelectric power plants to generate energy.
AES Brazil the subsidiary of AES Corporation intends to expand its business.But, due to the government imposed restrictions on hydro power plant, company intends to invest in thermal power plant project. To achieve its goal company intends to invest in a500-megawatt thermal power plant in the state of Sao Paulo in southeast Brazil. But before making any decision company intends to evaluate the project and our team has helped the company in evaluating this project.
We used NPV model to evaluate 500-megawatt thermal power plant in our evaluation we considered three situations: Base case scenario, Optimistic Scenario and Pessimistic Scenario along with this, we also determined the bidding price for this project under all three options.
Analysis
In our NPV analysis, we assumed that the inflation rate of the country is 4%, therefore, all the cash flows are inflated by 4%.Furthermore, we assumed that the COFINS Tax rate is 7.60%. The NPV of the project under Base Case Scenario is $19.59million while in the Optimistic and Pessimistic scenario it is $29.46 million and $5.32 million.
Furthermore, the bid price in dollar is approximately $21.37 million while the NPV of the project under base case scenario, optimistic scenario, and the pessimistic scenario is approximately $19.59 million, $29.46 million and $5.32 million, therefore, the breakeven under base case scenario, optimistic scenario, and pessimistic scenario is $19.59 million, $21.37 million and $5.32 million.
Conclusion
As the NPV of the project is positive under all three options, therefore, the company should accept this project.Furthermore, as the NPV under pessimistic scenario is $5.32 million, therefore, the minimum bidding price should not be less than it and the maximum bidding price should not be more than $19.59 million else the project will become worthless for the company.............
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