Abstract

This case exposes students to financial decision-making in government enterprises and the concepts of financial and economic rate of return. It is based on actual electrification projects being undertaken by the Indian Railways, one of the largest government organizations in the world. Electrification projects require large capital outlays with significant financial and welfare implications. The case analysis involves (i) estimating incremental cash flows under alternative scenarios, (ii) calculating the financial rate of return, and (iii) conducting sensitivity analysis to identify the key value drivers. It also provides opportunities to discuss nominal vs. real cash flows, differences between internal rate of return and net present value, and the choice of different discount rates. The case is suitable for a course on Corporate Finance and Valuation.

Learning Objective

The objectives are to illustrate: (i) the nuances of capital budgeting decision-making in a government or public sector enterprise, (ii) the estimation of incremental cash flows in a complex setting, (iii) the process of calculation of internal rate of return, (iv) the importance of sensitivity analysis, (v) the concept of economic rate of return and, (vi) the presence of real options in projects.