Vishal is a Mechanical Engineer with over three decades of experience. After completion of his graduation, he has worked in the global oil and gas industry for various companies as an employee. Given his vast experience

Vishal is a Mechanical Engineer with over three decades of experience. After completion of his graduation, he has worked in the global oil and gas industry for various companies as an employee. Given his vast experience in the energy sector; Vishal is often invited to various conferences on the oil and gas industry. One such conference was on "Areas of opportunities common to all include the India growth story" given the demographic dividend and energy independence. Vishal recognizes the huge potential of the oil and gas sector in India and sets up an engineering and construction company M/s. Mid-Stream & Co., based in Kolkata. The first bid for the project is a gas pipeline for a Government Company. The initial outlay for the project is ₹ 5,75,00,000. The duration of the project is five years. The expected cash inflows from the project are given below : Year ₹ 1 1,75,00,000 2 1,95,00,000 3 1,90,00,000 4 2,85,00,000 5 2,40,00,000 The acceptable rate of return for M/s. Mid-Stream & Co. is 15%. Anuja, CFO of M/s. Mid-Stream & Co. recommends a risk premium of 3% over and above the acceptable rate of 15% given the risky nature of the project. Vishal estimates duration to recover the initial cost of the project. Anuja mentions that it would be prudent to use discounted cash flows for such calculations. A risk management perspective also would involve a more conservative approach in terms of Cash Flow estimation. Anuja mentions that the firm needs to make more conservative estimates of cash flow using the Certainty Equivalent technique with a discount rate of 15% to be used. Cash Flows from Government project with Certainty Coefficients : Year ₹ Certainty Coefficients 1 1,75,00,000 0.90 2 1,95,00,000 0.88 3 1,90,00,000 0.85 4 2,85,00,000 0.81 5 2,40,00,000 0.65 Present Value Factors are given below : Years 0 1 2 3 4 5 Discount rate 15% 1 0.87 0.76 0.66 0.57 0.50 18% 1 0.85 0.72 0.61 0.52 0.44 Calculate NPV of the Government project, after application of Certainty Coefficients.