Electric Power Disadvantages

1357 Words6 Pages
Electric power is important for enhancement and uplift of rural areas. According to a paper published by Indian Merchants Chamber’s Economic Research and Training Foundation, in 2011, Agriculture sector in India accounted for about 35% of power consumption only for running electrically operated pump sets for irrigation. This sector is acutely hampered by power shortage. The impact of such shortages increases many times in agriculture because of the following reasons:- 1) There is adverse impact on crop production due to insufficient and inadequate irrigation. This is due to the lack of continuous and fluctuation free electricity supply to the irrigation pumps. This results in food shortages because of insufficient production. This acts as…show more content…
Similarly, capital budgeting in Indian power projects is largely done by following the Internal Rate of Return or IRR method. This method has advantages as well as disadvantages. The advantages of this method include incorporation of time value of money information and simplicity of analysis. In addition, required rate of return is not required to be calculated beforehand. There is also an option of keeping a safety margin over and above the decided Hurdle Rate to reduce risk factors. The disadvantages of this method are that firstly it completely ignores the economies of scale or the actual rupee value of benefits. A Rs. 100 crore project with 25% return should be favored over a Rs. 10 crore project with 50% return but IRR method advises us otherwise. Secondly, it has an impractical assumption of a reinvestment rate. IRR method implicitly assumes that positive cash flows are reinvested at internal rate of return. If the project has low IRR, it will assume investment at low rate of return whereas if the project has high IRR, it will assume investment at high rate of return. This is practically not valid. By the time you receive those cash flows, having the same level of investment opportunities being available is rarely seen. IRR method also ignores contingency requirements. This means that once you decide investing in a project, you have to invest in other assets necessary for that project. If total benefits out of the project are just wiped out in arranging those special assets or contingencies, then there is no point investing in a project with high IRR. IRR may not provide us with the perfect answer in the case of mutually exclusive projects. Mutually exclusive projects are those in which we automatically disqualify one project if the other is chosen for investment. This may be so because we have

More about Electric Power Disadvantages

Open Document