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Project Management Assignment: Project Initiation, Planning & Execution for Tilt Renewables

Question

Task

This project management assignment is made up of two parts:

Part A: Students are asked to imagine they have been engaged by a Renewable Energy (utilities) company to develop a report on key aspects of project risk management and how they might be used in proposed future projects in order to manage and limit risk.

The report should begin with a short executive summary and conclude with several, short general recommendations. The content you include in the report should link the project management principles detailed below with the practices of the renewable energy company you have been allocated.

The topics on which students need to make recommendations in their report include:

  • Project selection – How should the company you select determine what projects to undertake and what ones to avoid? What tools, measures, and practices are available to project analysts in this industry?
  • Cost management – What is the role of project cost management for your chosen company? Why is it important? What strategies or approaches should the company you have chosen adopt in order to effectively manage project costs?
  • Financing – What financing measures or options are generally available to assist companies like the one you have chosen to fund proposed new projects? The report should include reference to any implications associated with different funding types or models.
  • Implementation and winding up – Are there any particular issues associated with commencing a project that your company must consider? Why are they important? Who do they impact or affect? What happens when the project finishes? How are projects wound up? Do they just end or are there resource or infrastructure considerations? Are there environmental issues associated with the end of a project?

PART B: Consider the following three sources and answer the following questions directly. You do not need to write a lot for each question and for some you will need to use excel calculations. Submit you excel spreadsheet together with your report in the separate submission inbox on the assessment table.

Source 1: Tilt Renewables Snowtown North Solar Energy Farm
(https://www.tiltrenewables.com/assets-and-projects/Snowtown-North-Solar-Energy-Farm/)

Source 2: Tilt Renewables (TLT.NZ) Yahoo Finance (https://au.finance.yahoo.com/quote/TLT.NZ/ )

Source 3: Tilt Renewables Financials (https://au.finance.yahoo.com/quote/TLT.NZ/financials?p=TLT.NZ)
You have been employed as a project manager by Tilt Renewables and asked to evaluate a solar farm project at Snowtown run by Tilt Energy.

You have been asked to evaluate whether Tilt Renewables should undertake the Snowtown North Solar Energy Farm based on the above sources. Assume this project has not yet been approved.

  • Assume this is a twenty-five-year project.
  • Consult source 1 for the estimated initial outlay/investment today (year 0)
  • The investment will be depreciated on a straight-line basis over twenty-five years to 0 book value. It is estimated that the solar farm can be sold at the end of year 25 for $10 million.
  • The solar farm will sell $15,000,000 worth of electricity each year into the grid from year 1-25
  • Operating expenses for 25 years are $5.50 per solar panel per year.
  • The tax rate is 30%. All cash flows are annual and are received at the end of the year. The discount rate is 10%

a) Based on the above information calculate the FCFs of the project.

b) Calculate the NPV for the solar farm. Should Tilt Renewables undertake this project?

c) Does the NPV take into account the CO2 emission reductions that the project will lead to? Should it take this into account? Why or why not?

d) What is the debt to equity ratio in 2019 of Tilt Renewables according to source 3? How does this compare to other utility companies?

Answer

Part A

Executive summary
This report on project management assignment aims to address the tools and practices used by the company Tilt Renewables to evaluate a solar farm project at Snowtown run by Tilt Energy. The report discusses the project selection based on cost management, financing, and recommendations for the company. It focuses on the funding option through commercial loans and the selection criteria of project evaluation through positive NPV of the project.

Project Selection
The company will determine the selection of projects mainly, through the technique of Net Present Value Method based on the time value of money in project evaluation. The NPV method would determine the projects to be accepted or rejected based on the future net cash inflows that are estimated to be generated on the project undertaken.

Selection criteria:

Independent project carrying NPV greater than the initial investment, is stated that the project can be accepted. Mutually exclusive projects would have NPV of one of the projects being at a higher rate in comparison to the NPV of another project (Monnappa, 2020). The project having the highest NPV is determined to be selected. The independent projects having NPV less than $0 with a negative NPV will be rejected. Similarly, in the mutual exclusive projects; if one project has positive NPV while the other project has negative NPV; then the project having negative NPV will be rejected. It is also found that if both the projects have negative NPV estimated then, both of them will be rejected by the company.

The tools used are:

a. Gannt chart

b. Work-Breakdown structure

c. Risk assessment matrix

Expert judgement – This practice is undertaken by the company in most of the situations for considering the project investment. The expert judgement practice for example, by the top-management panel board help the project team to take decisions through project concept design of the strategies and the risk assessment to be done. Under the expert judgement practice, the risk assessment matrix is conducted with the projects that are to be accepted having high NPV (Mohammed, 2021). The chosen project is selected based on the frequency and the impact level of the risks assessed from the project charter as per the PMBOK Guide. Based on the feasibility, project risk rate and the rate of return from the project, judgement is made at the top-level management.

Cost management
The cost management plays a huge role in the company, Tilt Renewables with respect to the project costs ascertainment and the benefit -cost ratio as the selection criteria. The cost management undertakes the function of reducing the cost-overruns in the projects undertaken by the company.

The importance of cost management in the company lies in preparing the project budget and the cost-sheet of the raw materials, labour, overheads in the overall project. The cost control in project management by the company is mainly aimed for the estimation of the costs and benefits to be achieved in the project evaluation along with the financial risks associated with the resource utilization (Walker, 2015). In the renewable energy projects, the direct and indirect cost estimation is very much required for the project benchmarks to be executed b the team. Cost control is one of the important functions played by the project cost management in the company to reduce the high impact risks in terms of shortage of project funds and the financial loss over a project due to exploitation of resources (Steffen, 2018).

The cost-management strategies to use by company to effectively manage project costs are:

a. Cost management plan design- The cost management plan would help the company in estimation of the direct and indirect costs required in the project with the flexible budget preparational.

b. The cost-control approach as used by the company through sustainable cost audits in the form of estimation and budgeting through internal auditors make the opportunity cost reduced in the project.

Financing
The company, Tilt Renewables adopt the government grants option in the large-scale projects funding as undertaken. It partners with the Victorian State Government for the funding of raw materials resources like electricity and the power generation. These government grants as undertaken by the company increases the project viability to economic growth and the support received to cover up the cost overruns.

Commercial loans as adopted by the company in the projects as a form of debt financing depends on the availability of permission from the banks. The debt financing for covering the majority of 30%-50% of the costs in the project give much high financial reliability to execute the projects facing financial risks in the long-run (Egli et al., 2018).

Equity finance for the project covering 80-90% of the project through project sponsors and the third-party project investors make it a very feasible option in terms of the risky projects to be undertaken (Kutan et al., 2018). But, the claim on the income along with assets of the project is very high from this funding option that makes the project face operational risks in mid-stage of execution.

The options evaluated state that government grants cover up 10-40% of the project costs in the large-scale projects, which is a highly beneficial option for the company. The banks often reject the request of commercial loans, due to which this option is not feasible for the technological projects undertaken. However, the majority of finance from equity finance option through project sponsors making the risky projects getting executed is to be kept as an alternative for avoiding the high ownership claims.

Implementation and winding up
In the stage of commencing the project, the issue of operational and financial risk lies for the ending of the project. The costs and the risk level changes with the costs as associated to the increase in changes are increased with the progression level of project (Demirkesen and Ozorhon, 2017). With the wider risks in the political, economic and the technological aspects of the project, the risks continue in the iterative forms of the projects as undertaken by the company, Tilt Renewables. Through PESTLE analysis, the labour market for project continuation with the long-term project technological infrastructure facing changes in the environment create high quality pressures. On the other hand, he overall project risk in terms of the communication risk and the unrealistic project deadlines as set in the project planning stage makes the execution stage very difficult.

In the ending stage of project, there are issues of resource constraints in terms of the availability of the raw materials, equipment and labour for the project execution in the implementation stage brings high operational risks in the project execution stage. Based on the contribution margin, the resource constraint issue impact on the make or buy decisions of the products in the project undertaken by the company. The cost and staffing level risks are also present at the winding up stage of the project due to the reason that cost and staffing level are found to be dropped in the closing stage (Zolfaghari et al., 2017). With the output level being at a high risk of being low, the staffing level gets reduced rapidly causing labour shortage.

Conclusion and recommendations
The company will be benefiting if they undertake the project of solar panels. However, there are additional costs and bearings that the company must keep in mind and be vigilant of.

Tilt Renewables will need to establish a detailed budget that can utilize their existing resources and must be able to secure additional government funding to succeed in installing the project. Government fund aid will be a huge support and relief for the company. The company will need to decrease the operational costs and must have an energy policy that can give them at least 30% profit after initiating the project. It will help the organisation to implement sustainable goals and decrease their carbon footprint with the effective use of this project undertaken. The company can reduce up to 75% of energy savings through resource constraints being addressed under risk assessment matrix.

Part B

a) Estimation of the FCFs of the project
From the below highlighted table (Table 1) it can be identified that the FCFs value of the project for each year will be AU$10.89 million.

Calculation of Free Cash Flows of the project

Details

Amount

( in $ million )

Yearly revenue from selling of electricity

$15.00

Less: Operating expenses - per annum

$0.99

Less: Depreciation p.a.

$3.60

Earnings before interest and taxes (EBIT)

$10.41

Less: Taxes

$3.12

Net income

$7.29

Add: Depreciation

$3.60

Free cash flows per year

$10.89

Table 1: FCFs of the project per annum

(Source: Created by self)

b) Calculation of the NPV for the solar farm

Calculation of NPV of the project

Years

Discounting factor

@ 10%

FCFs

per annum

( in $ million )

PV of the FCFs

( in $ million )

1

0.909

$10.89

$9.90

2

0.826

$10.89

$9.00

3

0.751

$10.89

$8.18

4

0.683

$10.89

$7.44

5

0.621

$10.89

$6.76

6

0.564

$10.89

$6.15

7

0.513

$10.89

$5.59

8

0.467

$10.89

$5.08

9

0.424

$10.89

$4.62

10

0.386

$10.89

$4.20

11

0.350

$10.89

$3.82

12

0.319

$10.89

$3.47

13

0.290

$10.89

$3.15

14

0.263

$10.89

$2.87

15

0.239

$10.89

$2.61

16

0.218

$10.89

$2.37

17

0.198

$10.89

$2.15

18

0.180

$10.89

$1.96

19

0.164

$10.89

$1.78

20

0.149

$10.89

$1.62

21

0.135

$10.89

$1.47

22

0.123

$10.89

$1.34

23

0.112

$10.89

$1.22

24

0.102

$10.89

$1.11

25

0.092

$20.89

$1.93

Total PV of the cash flows

$99.74

Less: Initial investment/outlay

$100.00

Thus, net present value (NPV) of the project

-$0.26

Table 2: NPV of the project

(Source: Created by self)

Considering the above table (Table 2) the NPV of the project can be identified to be negative AU$0.26 million. Thus, through investing in this project the firm will eventually lose money over the period of time. Hence, from this aspect it can be stated that the company should not invest in this project as it is financially not viable.

c) Evaluation of consideration of CO2 emission reduction in NPV calculation
From the given Source 1 it can be identified that the project has identified that it will offset 85,000 tonnes of CO2 which are produced by the coal fired electricity generation per year. Thus, it can be stated that the NPV takes into account the CO2 emission reductions that the project will lead to. This is important to take into account as it will help to deliver on South Australia’s Energy Policy for competitive, reliable and clean power for all in the near future.

d) Estimation and comparison of debt-to-equity ratio of Tilt Renewables with other companies

Debt to equity ratio condition in 2019

 

Tilt Renewables

(Amount in '000)

Trustpower Limited

(Amount in '000)

Infratil Limited

(Amount in '000)

Total debt

915525

965530

3987500

Total equities

684949

1224403

1647100

D/E Ratio ( in times )

= Total debts / Total equities

915525 / 684949

965530 / 1224403

3987500 / 1647100

 

1.34

0.79

2.42

Table 3: D/E ratio

(Source: Created by self)

The D/E ratio of Tilt is 1.34 and compared to Trustpower Ltd it can be identified to be significantly higher. However, compared with Infratil Ltd, it can be stated that Tilt has a better debt contribution. Thus, an average D/E ratio can be observed for the firm and the management should focus on minimising its debt contribution in the capital structure.

Current share price and issuing date of first share
The current share price of the company is NZD 8.02. The company’s issuing date of first share was on 23 October 2016.

List of references
Demirkesen, S. and Ozorhon, B., 2017. Impact of integration management on construction project management performance. International Journal of Project Management, 35(8), pp.1639-1654.

Egli, F., Steffen, B. and Schmidt, T.S., 2018. A dynamic analysis of financing conditions for renewable energy technologies. Nature Energy, 3(12), pp.1084-1092.

Kutan, A.M., Paramati, S.R., Ummalla, M. and Zakari, A., 2018. Financing renewable energy projects in major emerging market economies: Evidence in the perspective of sustainable economic development. Emerging Markets Finance and Trade, 54(8), pp.1761-1777.

Mohammed, H.J., 2021. The optimal project selection in portfolio management using fuzzy multi-criteria decision-making methodology. Journal of Sustainable Finance & Investment, pp.1-17.

Monnappa, A., 2020. Project Selection Methods for Project Management Professionals.

Steffen, B., 2018. The importance of project finance for renewable energy projects. Energy Economics, 69, pp.280-294.

Walker, A., 2015. Project management in construction. John Wiley & Sons.

Zolfaghari, S., Aliahmadi, A. and Mazdeh, M.M., 2017. From strategy to project effectiveness: introducing the three stages of strategic project management. International Journal of Business Excellence, 12(3), pp.308-328.

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