#1 Valuation

(c) Michael Kraten, All Rights Reserved.

Here is the link to the introduction of the case.
This is the first module of the case.
Here is the link to the second module of the case.
Here is the link to the third module of the case.
Here is the link to the fourth module of the case.

The senior partner at BFAC has decided to ask the global energy firm WOW (i.e. World of Water, Inc.) for more information about the Vastarian hydroelectric project. He learns that WOW has secured a contract from the government to manage a $50 million hydroelectric power plant facility that is now under construction by a firm that is owned by the brother of the King of Vastaria.

WOW’s project fee proposal was based on a valuation estimate that relied on a rudimentary profit and cash flow spreadsheet model. The BFAC partner is concerned that the spreadsheet model incorporated a limited set of assumptions that were compiled from sources of questionable accuracy.

The partner asks you to assess whether the spreadsheet model provided sufficient data to WOW to determine whether the project itself is financially feasible. If not, then the partner fears that he may need to inform WOW that they should consider a complete withdrawal from Vastaria.

1. You must demonstrate that you can review different sets of authoritative literature, and that you can select the set that best provides relevant guidance to a vaguely defined business question or challenge.

In other words, you must: (a) identify the objective that the organization is attempting to achieve, and (b) select the set of authoritative literature that best applies to the situation.


a. Identify the primary performance metric of WOW as a publicly traded corporation.

b. Identify other types of performance metrics, using at least one universal organizational framework. Hint: You may wish to review our compilation of Reference Materials in our Project Content list for possible framework(s).

c. Review the WOW spreadsheet and correct any apparent coding errors. Note whether the project is feasible, from an accounting perspective, throughout its time horizon.

d. Assuming that WOW’s cost of equity capital is 5%, compute Net Present Value and the Internal Rate of Return. Note whether the project’s valuation is acceptable from a financial investment perspective.

2. You must interpret and apply the relevant authoritative guidance to the question or challenge in a manner that supports and defends a business recommendation.

In other words, you must make a recommendation to the organization, and must describe how your recommendation will help the organization achieve its objective. You must also describe how well the authoritative literature supports your recommendation.


a. On the valuation spreadsheet, modify at least one volume assumption, one cost assumption, and one revenue assumption to reflect the anticipated future evolution of industry conditions.

b. Reassess the project’s feasibility and valuation expectations under different debt to equity (i.e. proportion of long term debt to equity capital) funding strategies.

c. Add at least one omitted variable (such as a terminal value assumption) to the spreadsheet and reassess the project again.

d. Perform a sensitivity analysis on other major spreadsheet assumptions. Identify the assumptions that significantly impact the assessment process.

3. You must assess how well, or how poorly, the business recommendation has been implemented in similar situations that have been confronted by similar organizations.

In other words, you must describe how other organizations in the “real world” have achieved this objective. You must note whether these organizations followed your recommendations, and (if so) whether they achieved their objectives.


a. Review “real world” case information regarding the Oregon Bull Run and China Three Gorges projects. (Hint: You may wish to review our compilation of Reference Materials in our Project Content list for such information.) Then select the project that has prepared a more effective decommissioning (i.e. termination) plan.

b. Compare these decommissioning plans to relevant plans, if any, that have been developed by WOW. Assess the relative effectiveness of WOW’s plans.

c. Identify the social and cultural factors that impact valuation activities.

d. Modify the valuation spreadsheet to incorporate these factors. Reassess the feasibility and the valuation of the project.

4. You must develop a plan of action that addresses the possibility that your business recommendation may fail to achieve the business objective.

In other words, you must define how success or failure should be measured. And when measurements indicate that failure is likely, you must describe what the organization should do.


a. Define three WOW objectives in accordance with the “triple bottom line” framework.

b. For each objective, identify the event that would represent a catastrophic failure sufficiently significant to trigger the termination of the project.

c. Define the probability of occurrence of each catastrophic failure.

d. Utilizing Bayesian probability analysis, analyze the “success scenario” and the three “failure scenarios.” Reassess the feasibility and the valuation of the project.