Expected rate of return of Chilime Hydropower
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This document analyzes the financial performance of the Chilime Hydropower Project located in Rasuwa District, Nepal. A group of 6 students conducted the analysis to calculate the variance, covariance, beta, and expected rate of return of the project. They collected market index and stock price data from July 2009 to June 2010 and used the capital asset pricing model formula in Excel. The results showed the project's beta was low at 0.08982, variance was positive, and expected returns were higher than the risk-free rate, indicating the investment was profitable. Therefore, the document concludes Chilime Hydropower is a good investment opportunity.
Expected rate of return of Chilime Hydropower
- 1. Group Members: •Anmol Pasa Shrestha •Chhitiz Shrestha •Pooja Shah •Rashmita Regmi •Sarala Bogati •Sunita Shrestha
- 2. Introduction • Constructed and owned by Chilime Hydropower Company Limited • located at 133 km north of Kathmandu at the right bank of Bhotekoshi River in Rasuwa District • installed capacity of 22.1 MW • Delivers power via 38 km long 66 kV single circuit transmission line at Trisuli Power House Switchyard • The electricity generated from the power plant is purchased by NEA and evacuated as per the PPA made on June 25, 1997
- 3. Introduction • First amendment made on December 10, 2007 • Annual deemed energy salable to NEA is 132.918 GWh • The plant has started its commercial generation from 8th Bhadra 2060 (24th August 2003).
- 4. Introduction
- 5. Purpose of the study • Financial analysis of Chilime Hydropower Project • Calculation of financial aspects like Variance, Covariance, Beta and Expected rate of return • Interpretation of the data and findings • Learn the actual approach of Beta and how is it used by people • Understanding the practical aspect of Capital Asset Pricing Model • Overall Profitability of Chilime Hydropower Project
- 6. Methodology • Collected data from NEPSE index and data provided by our finance instructor, Mr. Sarthak Karki • Used MS Excel to calculate Variance, Covariance, Beta and the Rate of return • Collected relevant information abut the data and the data calculation techniques from the internet
- 7. Calculation (Market index) Date Market Index • First of all the Jul-09 8715.8 monthly market data Aug-09 8314.76 Sep-09 7907.95 were collected from Oct-09 7689.16 July 2009 to June Nov-09 Dec-09 7654.89 7411.35 2010. Jan-10 7286.97 • Then the average for Feb-10 Mar-10 12635.05 7890.53 each month was Apr-10 7101.47 tabulated May-10 7406.08 Jun-10 7718
- 8. Calculation (Stock Price Index) Date Stock Price Index • The monthly stock 9-Jul 9-Aug 1160 1109 price information was 9-Sep 1063 collected from 9-Oct 1053 9-Nov 1022 relevant source 9-Dec 1014 • Then its average stock 10-Jan 996 10-Feb 994 price per month was 10-Mar 920 calculated 10-Apr 847 10-May 962 10-Jun 965
- 9. Calculation (Covariance, Variance and Beta) • The Market index and Stock price index were inserted in the preset formula in MS Excel • Excel helped to tabulate the Covariance, Variance and Beta • The covariance of the given data was 0.004468318 • The Variance of the tabulated data set was 0.049745347 • The Beta calculated from the given data set 0.089824
- 10. Calculation (Covariance, Variance and Beta) Market ln(Market Market Stock ln(Stock Stock Year Month index index) returns price price) returns 2009 July 8715.8 9.072892749 -4.71% 1160 7.056175284 -4.50% 2009 August 8314.76 9.025787528 -5.02% 1109 7.011213987 -4.24% 2009 September 7907.95 8.975623862 -2.81% 1063 6.968850378 -0.95% 2009 October 7689.16 8.947566824 -0.45% 1053 6.959398512 -2.99% 2009 November 7654.89 8.943099938 -3.23% 1022 6.929516771 -0.79% 2009 December 7411.35 8.910767888 -1.69% 1014 6.921658184 -1.79% 2010 January 7286.97 8.893843101 55.04% 996 6.903747258 -0.20% 2010 February 12635.05 9.444229977 -47.08% 994 6.901737207 -7.74% 2010 March 7890.53 8.973418585 -10.54% 920 6.82437367 -8.27% 2010 April 7101.47 8.868057084 4.20% 847 6.741700695 12.73% 2010 May 7406.08 8.910056563 4.13% 962 6.869014451 0.31% 2010 June 7718 8.951310542 4.13% 965 6.872128101 0.31%
- 11. Calculation (Expected Rate of Return) • To calculate the Expected rate of return, the risk free rates of T-bills was retrieved • Averages were calculated for the relevant months • Used Rf+ß(Rm-Rf) to calculate expected return • ß and Rm pre calculated and used in the formula
- 12. Calculation (Expected Rate of Return) Date Rf Rm Rm-Rf ß(Rm-Rf) Rf+ß(Rm-Rf) Jul-09 5.14 -4.71 -0.09853 -0.00885 4.25754845 Aug-09 2.05 -5.02 -0.07068 -0.00635 1.41269715 Sep-09 2.38 -2.81 -0.05193 -0.00466 1.91610965 Oct-09 3.35 -0.45 -0.03796 -0.00341 3.00504328 Nov-09 5.57 -3.23 -0.08795 -0.0079 4.7750331 Dec-09 7.21 -1.69 -0.08896 -0.00799 6.40696128 Jan-10 9.07 55.04 0.4597 0.04129 13.1990254 Feb-10 8.66 -47.08 -0.55738 -0.05006 3.65115775 Mar-10 6.68 -10.54 -0.1722 -0.01547 5.1332996 Apr-10 8.13 4.20 -0.03934 -0.00353 7.78064812 May-10 6.81 4.13 -0.02683 -0.00241 6.571762641 Jun-10 7.37 4.13 -0.03236 -0.00291 7.075105833
- 13. Findings Market returns 60.00% 40.00% 20.00% 0.00% 1 2 3 Market returns -20.00% 4 5 6 7 Market returns 8 9 -40.00% 10 11 12 -60.00%
- 14. Findings Stock returns 15.00% 10.00% 5.00% 0.00% Stock returns 1 2 -5.00% 3 4 5 6 Stock returns 7 8 9 10 11 12 -10.00%
- 15. Findings Stock Price Index 1200 1000 800 600 400 200 0 Stock Price Index
- 16. Findings • Beta was 0.08982, so the level of risk was quite low. • The return from investment is higher than the return that we expected so variance is positive (i.e. 0.049745347). • It means the investment portfolio is positive
- 17. Findings • For some months, both stock and market index are negative like in July 2009 – March 2010 • From April 2010 to June 2010 both are positive. • Covariance is also positive (i.e. 0.004468318). • Risk free securities are taken for 91 days and we have taken for the year July 2009 to June 2010.
- 18. Findings Expected Return 15 10 5 0 Rf+ß(Rm-Rf)
- 19. Conclusion • Stocks with a high beta should have a higher return than the market • The CAPM shows that the expected return of a security or a portfolio should equal the rate on a risk-free security plus a risk premium • If this expected return does not meet or exceed the required return, the investment should not be undertaken
- 20. Conclusion • Chilime hydropower project is one of the most profitable investments in Nepal • Chilime can offer good dividend and cash returns to the investors • The Company’s net profit has crossed NRs.843 million in the last fiscal year • Because of its profitability it has a relatively high share price • It is a good time to own a share of Chilime Hydropower Project
- 21. Conclusion