Mahatma Gandhi University provides "Accounting and finance for Managers" Case Study for MBA Program. http://www.mgu.edu.in/

1. Case Study 1: Red Berry Energy Limited
Organization’s Overview
Red Berry, based in India, focuses on providing the economical wind energy solutions that
transform the kinetic energy of wind into electricity. Its clients comprise governments and
corporations, such as utility organizations. Red Berry manufactures turbines and generators at its
production centers in India, China, Germany, and the United States and provides repair and
maintenance services.
Red Berry's insistent extension strategy focuses on
low-cost production and regional price prejudice. As
the world’s third major wind-turbine producer with
a market share of 10.7% worldwide and 60% in
India, Red Berry extended its operations swiftly
before the recession of 2008 by including suppliers
in its supply chain. However, Red Berry has divested
in some of its investments and reduced its debt
burden.
Issues before Red Berry
In 2008, Red Berry’s clients in the United States and India complained that Red Berry's wind
turbines cracked in high winds and failed to generate the power yields stated in sales contracts.
Several clients terminated their orders from Red Berry because of some quality issues. The
organization renovated 1,251 turbine blades for a total of $100 million to honor the warranty of
its product in 2009. The faulty turbine blades not only proved costly to repair, but they also
hampered the organization's goodwill.
The disordered economic atmosphere and international credit crisis slowed down the growth of
swiftly rising wind energy markets in different countries, such as U.S. and Europe. A Danish
consulting organization anticipated that orders received by wind turbine producers dropped by
56% in the first half of 2009. However, the wind turbine market is improving, and as a result of
this, the liquidity position of Red Berry's clients improves. In fact, the U.S. wind industry saw
record growth in 2009 as it increased its power producing capacity by nearly 10,000 megawatts.
The wind turbines were set up mainly due to encouragement from the American Recovery and
Reinvestment Act of 2009. The total installed capacity in the U.S. is now over 35,000 MW.
Wind power is a completely renewable source of energy, which generates less pollution. The
advancement in technology has made it more viable to generate wind power. In addition, the
rising prices of oil have made the wind power more financially attractive. It is important to note
that an energy producing organization, such as Red Berry, is dependent on government subsidies
to earn the revenue, given that oil, coal, and nuclear energy are cheaper energy sources.
Red Berry has suffered losses for various quarters. Its net losses in the second quarter of the
existing fiscal year amounted to ` 298 crores. Its revenue also decreased to ` 3875 crores, against
` 4,884 crores a year ago. However, Red Berry is looking to enlarge its profitability and has
directed to secure several high profile contracts in 2011, such as 1,500 megawatt project from
Orange Energy India.
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Business and Financial Metrics
Fiscal Quarter Ended March 2010
Red Berry's revenue declined to 22% for the quarter ended March 2010. Sales volume of Red
Berry's business was reduced by 35% and became 740 MW due to order delays.
In the U.S., order volume remained less due to low gas prices and low electricity demand. Red
Berry expects the markets to recover by 2011 and 2012 because the government has provided
investment tax credits. In Europe, the debt crisis has resulted in reducing energy subsidies and the
amount available for project financing. Red Berry started manufacturing wind turbines
particularly designed to work at low-wind speeds.
First Quarter Fiscal 2010-2011 Results
Throughout the first quarter of 2010-2011, Red Berry earned revenues of ` 3,499 crores. The
organization's gross margin is stable at 40%. Red Berry reported a net loss of ` 813 crores due to
low sales volumes and foreign exchange loss of ` 360 crores. Its total orders throughout the
quarter were approximately $4.9 billion. It has also received orders from Indian organization for
generating 670 MW power.
Second Quarter Fiscal 2010-2011 Results
During the second quarter of 2010, Red Berry accounted a net loss of ` 278.11 crores compared to
a loss of ` 271.50 crores in the second quarter of 2009. The organization generated ` 4,632.03
crores revenue in the first quarter of 2010 as compared to ` 5,870.78 crores in the second quarter
of 2009. About 95% of Red Berry's revenue was generated from its wind turbine generator
business, whereas, the rest is generated from its gear box, foundry, and forging businesses.
Globalization Strategy and Vertical Integration
Red Berry is concentrating on globalization by using various methods. First, it gets advantage from
India's depreciating currency, as its products become cheaper as compared to the products of
other manufacturers. Second, Red Berry presents different sales packages in different countries.
For example, in China, where prices are low, Red Berry provides full power plants, but in the U.S.,
Red Berry establishes cheaper turbine generators. This price discrimination facilitates Red Berry
to reduce its costs and maximize its profit margin.
Red Berry is raising its international reach with its Research and Development (R&D) branch in
Europe. The organization is producing in India and China and focusing on top international wind
energy markets. In 2004, 80% of Red Berry’s sales were in India; by 2007, international sales
accounted for 62% of the total.
Red Berry keeps on expanding its operations in new countries and maintaining its position in the
existing market. For example, in January 2011, Red Berry received its first order from Trivets, a
Swedish wind power manufacturer. The Swedish organization ordered two 3.2 MW wind turbines.
In addition, as of November 2011, Red Berry campaigns to set up offices in several Latin American
countries, including Mexico, Argentina, and Chile.
Although Red Berry is growing globally, it is still focusing on expanding its operations in India. For
example, in January 2012, the organization proclaimed an order for 1,200 MW of wind turbines of
value $2.18 billion from Caper Energy India. It has also received one big order from Veda and
many other orders from India.
Acquisitions and Divestitures
Prior to the recession in 2008, Red Berry insistently pursued an acquisition strategy to remove
minor competitors. For example, in July 2006, Red Berry acquired the German wind turbine
developer, XYZ Power, for $2.8 billion (USD) to decrease competition and obtain new product
lines. XYZ Power captured 9% market share in Germany and provided Red Berry a strong grip in
the Western European market.

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Still, a destabilized U.S. wind turbine market has made Red Berry managers to re-evaluate its
expansion strategy. Red Berry sold 34% holding in a subsidiary, Wisdom Transmissions, for $480
million, in its efforts to decrease debt. After selling Wisdom Transmissions, Red Berry's stake in
the gear box maker declined to 34% from 59%. Red Berry purchased the Belgium-based Wisdom
in 2005 for $668 million.
Red Berry remained burdened with debt as a result of its quick expansion strategy. The
organization raised debt in 2006 to acquire XYZ Power for $2.8 billion and construct new factories
in the U.S., China, and India. Credit Rating Information Services of India anticipated that $3.3
billion of net debt was raised by Red Berry in 2008 and it was 1.6 times of its equity at that time.
In November 2010, though, Red Berry repaid its debt of $680 million, which it raised for acquiring
Wisdom Transmission. After that, it again raised a new six-year loan of $465 million from the State
Bank of India. At this time, Red Berry's net debt was lowered by $360 million, and its total debt has
been decreased by 16%. Its debt-to-equity ratio was still high at 1.1. As Red Berry kept on
reducing its debt, its interest payments also declined.
The 2008 Financial Recession has Slowed Down the Growth of Wind Energy Sector in 2009
Although there was swift development in the wind energy sector in 2008, the unstable economic
environment and international credit crisis have led some of the fast growing markets, such as U.S.
and Europe, sluggish in terms of new capacity additions. For example, Emerging Energy Research
estimates that new wind plant activations in Europe in 2009 could drop by as much as 18% as
compared to 2008. Europe was expected to add 7,836 MW of wind power capacity in 2009, down
from 9,556 MW in 2008. The credit crisis has also decreased the number of wind projects in the
United Kingdom, Italy, and France.
According to the Danish consulting organization, MADE, the wind turbine manufacturers reported
a 52% drop in orders in the first half of 2009. In response of falling demand, Red Berry reduced its
work force from 290 to 80 at its Minnesota plant in 2009, which has the ability to manufacture 300
turbines per year. However, analysts anticipated demand to rise in the fourth quarter of 2009. Red
Berry anticipates to sell equipment capable of producing 2,700 MW of electricity in the year
ending March 31, 2011, down from 2,890 MW installed in the preceding year.
Government Restrictions on Foreign Wind Turbine Suppliers in China
Public sector utilities in China have shown a preference for buying wind turbines from low-cost,
local manufacturers. There are three leaders in turbine production in China, and 60 smaller
companies. Foreign companies like Red Berry have been losing market share in China, which is
now the world's largest for wind turbines after several years of nearly 80% annual growth.
Chinese manufacturers, which are generally less technologically sophisticated than those of
foreign companies, sell turbines for about 5% less than those made by Red Berry, but as much as
20% below those of other foreign companies.
Some Chinese localization rules like those at the largest wind farm in the world in Rudong, China,
prevent non-Chinese manufacturers from selling turbines. These rules require 70% of turbine
equipment to be sourced and built domestically. The Chinese government has also sought to
eliminate turbines with capacities of less than one megawatt, a policy which is favorable to
domestic Chinese turbine manufacturers. China's National Energy Administration predicted that
China's wind power capacity is likely to rise from 12,000 megawatts at the end of 2008 to 30,000
megawatts by the end of 2011, a goal that will require about 100 billion yuan ($14.6 billion) in
investment. However, unfavorable policies for foreign turbine manufacturers in China put
companies like Red Berry at a disadvantage and weaken their foothold in one of the most
promising wind markets in the world.
Despite China's stringent policies regarding sourcing of wind turbines, it still represents a market
with the most growth potential in the world. China relies on coal to generate about 70 percent of
electric power. The country is expected to have 120 million to 150 million kilowatts of installed
wind power capacity, totaling 7 to 9 percent of the national total installed electricity capacity, in

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2020, according to the China Energy and Environment Technology Association. This represents an
enormous investment opportunity for wind turbine manufacturers such as Red Berry.
Government Regulation of Energy Markets
Clean energy companies are highly dependent on government subsidies and support to bring in
revenue, given that oil, coal, and nuclear energy are cheaper, well-established energy sources and
hold oligopolistic control over the world-wide energy market. Given this dependence on the
government, many environmental and social movements are focusing on pressuring the
government to pave the way for a transition to renewables. Furthermore, many governments
endorse local renewables as an alternative to foreign fossil fuels, in an attempt to create energy
independence. Government support of renewables is taking place at local, national, and global
scales. One significant example is that in September 2009, the U.S. government announced it had
awarded more than $500 million in grants to help finance wind projects under a $787 billion
stimulus package designed to help revive the economy.
The Kyoto Protocol
The Kyoto Protocol is an international agreement to reduce greenhouse gas emissions in a global
effort to stop climate change. The Kyoto Protocol mandates emissions caps through cap-and-trade
systems of trading carbon credit. This system has the potential to benefit Red Berry as many
countries make the transition to renewable energy such as wind power.
The U.S. has not ratified the treaty and has no plans to do so. China, while part of the treaty, is
classified as a developing country and therefore has no obligation to lower its emissions.
Domestic Legislation
Given the fear of global warming and pollution, which has led to increasing social support for clean
energy sources, governments around the world have implemented legislation that indirectly leads
to increased revenues for Red Berry. Examples include:
 California has mandated that 25% of electricity come from clean sources by 2020 and 75% by
2050
 The Obama administration authorized $100 billion of spending and tax breaks for green
projects by signing the stimulus package into law
 The Renewable Energy Standard bill, which would require utilities to generate 6% of their
energy from renewables by 2012 and 25% by 2025, is being considered at the committee
stage in the Unit States Congress
 The European Union aims to get 22% of its energy from clean sources by 2010
 China's Renewable Energy Law raises the target for the total percentage of renewable energy
used in the country to 10% by 2020
 In February 2009, President Obama extended tax credits for wind and increased the amount
the government will spend on those credits by 30 percent. Obama said he would invest $15
billion a year in renewable energy sources to create five million new energy jobs through
2018.
Legislative mandates like these benefit renewable energy companies because they force utilities
companies to turn to other power sources, allowing companies like Red Berry to enter a crowded
energy market. Also, such legislation usually leads to government support for renewable energy
companies in the form of fiscal incentives.
Questions:
Q1. What were the main reasons behind the problem of Red Berry?
Ans. The main reasons behind the problem of Red Berry were as follows:
 Occurrence of global economic recession
 Increase in the debt to finance acquisitions

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 Unbalanced debt-equity ratio
 Restrictions imposed by the Chinese government on foreign wind energy organizations
 Reduction in subsidies to energy producing organizations in Europe
 Production of defective turbine blades
Q2. What steps should have taken by Red Berry during recession?
Ans. The following steps should have been taken by Red Berry during recession:
 Decreasing debt and raising funds by using equity shares
 Avoiding any expansion by the way of any acquisition
 Manufacturing quality products to enhance position in the market
 Making economically feasible projects that could be implemented in different countries
 Requesting the Indian government to provide more subsidies
Q3. What were the main threats and opportunities before Red Berry?
Ans. The main threats before Red Berry were as follows:
 Global financial recession of 2008
 Increasing competition in the international market
 Decreasing subsidies that were the main source of profit
The main opportunities before Red Berry were as follows:
 Increasing the concern of world towards clean energy
 Development of the Indian economy
 Funds provided by the Obama administration
Case study 2: BSL Company Ltd.
Incorporated under the provision of Companies Act., 1956, BSL is engaged in manufacturing
different types of ceramic tiles. The company operates in the oligopolistic market and has several
branches across the country. In addition, it has a modern foundry located in Orissa. BSL purchases
raw materials from different suppliers and plans to take up a new project to manufacture vitrified
tiles. The new project would last for eight years and would be completed in three stages. The life
cycle of the new project is shown in the following figure:
Years Stage-1 Actual
Production
Efficiency
Expected
Production
Efficiency
1 Activities in stage 1 Infrastructure development
and commencement of
commercial production
100% 75%
Stage-2
2 Activities in stage 2 Commercial production
reaches its peak
100% 85%
3 Commercial production 100% 95%

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continues
Stage-3
4 Activities in stage 3 Commercial production
continues
100% 95%
5 Commercial production
continues
100% 95%
6 Commercial production
continues
100% 95%
7 Commercial production
continues
100% 95%
8 Commercial production
continues
100% 95%
In the new project, fixed investment would be ` 1200 million and working capital would be 20% of
sales. Stage 1 would require ` 700 millions for fixed investments. The company would use various
sources to finance stage 1. It would use retained earnings of ` 200 million and issue preference
shares carrying dividend of 15% (redemption 6 years) to raise ` 150 million. In addition, the
company would raise long-term loans @ 14% to finance rest of the amount (` 350 million). Stage 2
would require ` 500 million for fixed investments, which would be financed through raising loans
and issuing rights shares (15 million shares for `20 each). The stage 3 would continue without
further fixed investment. A proportion of working capital would be financed through long-term
loans at 25% rate of interest and the remaining proportion would be financed through short-term
borrowings from banks at the rate of 13% in all the three stages. Cost and other expenditures
incurred in the different stages are shown in the following table:
Stage-1 Stage-2 Stage-3
Fixed Cost 200 Millions 200 Millions 260 Millions
Variable Cost 50% of sales 65% of sales 70% of sales
Tax rate 30% 30% 30%
Depreciation on fixed capital 15% 15% 15%
After eight years, the project would be sold to fetch salvage value of ` 150 millions. It is important
to note that all the long-term and short-term loans would have a zero period of 1 year and they
need to be repaid in 5 equal installments.
The company is also planning to modernize its manufacturing process by acquiring new machines for
reducing operational cost and increasing profit. It invites tenders for the procurement of new machines
and the tender goes to those manufacturers who supply quality machines at low prices. The new
machines cost ` 200000 and have a useful life of 5 years after which it would fetch a net salvage
value of `30000. The new machines would also decrease working capital requirement by `10000.
The old machines have a book value of ` 50000 and market value of ` 40000. These machines can
fetch a net salvage value of ` 1000 after 5 years. The new machines would save power cost by `
5000 per year.
Question for Discussion:
Q1. Calculate the cash flow from the prospective of project manager and shareholders.

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Ans. The calculation of project cash flow from the prospective of project manager is as follows:
Year 0 1 2 3 4 5 6 7 8
Intial Outlay -850 -20 -640 -16 -16 0 0 0 0
Operating Cash Flow 112.5 145.1 268.6 276.9 287.4 280.1 274.2 269.6
Terminal Cash Flow 492
Project Cash Flow -850 92.5 -495 252.6 260.9 287.4 280.1 274.2 761.6
Fixed Investment -700 - -500 - - - - - -
Working Capital -150 -20 -140 -16 -16 - - - -
Initial Outlay -850 -20 -640 -16 -16 0 0 0 0
Revenue (1) 750 850 950 950 950 950 950 950
Revenue (2) - - 600 680 760 760 760 760
Variable Cost 487.5 552.5 1008 1060 1112 1112 1112 1112
Fixed Cost 150 150 240 240 240 240 240 240
Depreciation(1) 140 112 89.60 71.68 57.34 45.88 36.70 29.36
Depreciation(2) - - 100.00 80 64 51.2 40.96 32.77
EBT -27.5 35.5 112.9 178.8 237.2 261.4 280.8 296.4
Tax 2.4 33.9 53.6 71.1 78.4 84.3 88.9
EAT -27.5 33.1 79.03 125.17 166.01 183.00 196.59 207.46
Operating Cash Flow 112.5 145.1 268.63 276.85 287.35 280.07 274.25 269.59
Salvage Value - - - - - - - - 150
Working Capital - - - - - - - - 342
Terminal Cash Flow - - - - - - - - 492
The calculation of cash flow from the perspective of shareholders is as follows:
Year 0 1 2 3 4 5 6 7 8
Initial Investment -200 - -300 - - - - - -
Operating Cash Flow 21 53.4 174.3 216.8 223.4 257.7 251.8 269.6
Repayment Cash Flow -80 -80 -128 -128 -128 -198 -68
Terminal Cash Flow 240
Project Cash Flow -200 21 -327 94.3 88.84 95.38 129.7 53.75 441.6
The operating cash flow chart is prepared as follows:

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Year 0 1 2 3 4 5 6 7 8
1 Revenue (1) 750 850 950 950 950 950 950 950
2 Revenue (2) - - 600 680 760 760 760 760
3 Variable Cost 487.5 552.5 1008 1060 1112 1112 1112 1112
4 Fixed Cost 150 150 240 240 240 240 240 240
5 Depreciation(1) 140 112 89.60 71.68 57.34 45.88 36.70 29.36
6 Depreciation(2) - - 100.00 80 64 51.2 40.96 32.77
7 Interest (TL 1) 56 56 44.8 33.6 22.4 11.2 0 0
8 Interest (TL 2) - - 33.60 26.88 20.16 13.44 6.72 0
9 Interest (STL) 13 15.6 27.30 30.68 32.86 32.86 32.86 32.86
10 EBT -96.5 -36.1 7.20 87.66 161.74 261.4 280.8 296.4
11 Tax - - - - 37.2 78.4 84.3 88.9
12 EAT -96.5 -36.1 7.20 87.66 124.54 183.00 196.59 207.46
13 Pref. Div. 22.5 22.5 22.5 22.5 22.5 22.5 22.5 0
14 OCF - 21 53.4 174.30 216.84 223.38 257.57 251.75 269.59
Working Notes:
1. Total working capital requirement for stage 1 at 100% efficiency is 20% of 1000 lacs = `200
lacs
Margin required working capital is as follows= 25% of Rs 200lacs = ` 50 lacs
Total long-term funds needed for stage 1 = fixed investment + margin money = ` 750 lacs
Retained earnings = `200 lacs
Preference shares = ` 150 lacs
Long-term loans = ` 400 lacs
Similar calculations are performed for stage II and loan amount for stage II is ` 240 lacs.
Rest of the working capital is funded through short-term funds.
0 1 2 3 4 5 6 7 8
Loan Stage I 400 400 400 320 240 160 80
Repayment I - - 80 80 80 80 80
Interest I - 56 56 44.8 33.6 22.4 11.2
Loan II - - 240 240 240 192 144 96 48
Repayment II - - - - 48 48 48 48 48
Interest II 33.6 26.88 20.16 13.44 6.72
Working Capital 150 170 310 326 342 342 342 342
Margin 50 50 50 90 90 90 90 90 90
Short Term Loan 100 120 220 236 252 252 252 252
Interest (STL) 13 15.6 28.6 30.68 32.76 32.76 32.76 32.76
2. Tax is not payable in first 3 years due to losses. Tax is only payable after writing off
accumulated losses in the fourth year of operations from the profit left after writing off carry
forward losses.
3. Preference shares are redeemed at par in the 7th year.

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Q2. Determine the project cash flows of replacement project if depreciation rate is 25% and
applicable tax rate is 30%.
Ans. The project cash flows of replacement project is as follows:
0 1 2 3 4 5
Initial Outlay -150000 - - - - -
Operating Cash Flow - 47650 44838 42728 41146 39960
terminal Cash Flow - - - - - 8000
Project Cash Flow -150000 47650 44838 42728 41146 47960
Change in FI -160000 - - - - -
Change in WC 10000 - - - - -
Initial Outlay -150000 - - - - -
change in EBIT - 52000 52000 52000 52000 52000
Change in Depreciation - 37500 28125 21094 15820 11865
Change in EBT - 14500 23875 30906 36180 40135
Change in tax - 4350 7163 9272 10854 12040
Change in EAT - 10150 16713 21634 25326 28094
Operating Cash Flow - 47650 44838 42728 41146 39960
Change in Salvage Value - - - - - 18000
Change in WC - - - - - -10000
Terminal Cash Flow - - - - - 8000
Working Notes:
Initial outlay is ` 200000 minus ` 40000 (present market value of old machines)
Working capital is going to decrease with the procurement of new machines
Savings of ` 52000 per year is considered as increase in Earning Before Interest and Tax (EBIT)
Depreciation is calculated on incremental book value (200000 – 50000)
Change in salvage value is the increase in salvage value of new machines over old machines after 5
years
Change in working capital in terminal cash flow is considered outflow of cash