Question

1. You are required to evaluate and finance a big PPP (Public Private Participation) infrastructure Project.

In this type of project the bidder makes all the initial investment. In return it has the right to operate the facility for a definite period. At the end of this period turns it over to the state for free. In some cases the state can provide a guaranteed minimum income to support the entrepreneur. Nowadays most of the infrastructure projects are realized this way. The bidder has to bid the number of years it wants to operate the facility. The lowest bidder (lowest number of years of operating) usually is accorded the contract.

You are expected to base your calculations on 2 different scenarios:

      1-the state guaranteed cashflows (guaranteed)

     2-your technical team's projections (expected)

The projected cashflows of both alternatives for the first 5 years is given below. After 5 years (6th year and onwards) the cashflows will increase at the rate of 10% per year, which is the expected inflation rate.

Your company’s Minimum acceptable rate of return is 12%.

1. What is the breakeven number of years for this project for both alternatives? (the number of years required for the PV of this project =0) (round up your result to the nearest integer year).
2. If you bid for 25 years of operations what will be your NPV/IRR for both alternatives?

Year	Guaranteed Cashflow	Expected Cashflow
0	-10,000	-10,000
1	-20,000	-20,000
2	1,000	1,000
3	2,000	2,500
4	3,000	4,000
5	4,000	5,000
6	4,400	10% increase from previous period. Periods 9 and onward same 10% increase 5,500
7	4,840	6,050
8	5,324	6,655

                           

Answer 1

		Present Value(PV) of Cash Flow=(Cash Flow)/((1+i)^N)
		i=discount Rate=Minimum Acceptable Rate of Return=12%=0.12
		N=Year of Cash Flow
		ALTERNATIVE OF GUARANTEED CASH FLOW
		N	CF	PV=CF/(1.12^N)
		Year	Cash Flow	Present value	Cumulative Present avlue
		0	-10,000	(10,000)	(10,000)
		1	-20,000	(17,857)	(27,857)
		2	1,000	797	(27,060)
		3	2,000	1,424	(25,636)
		4	3,000	1,907	(23,730)
		5	4,000	2,270	(21,460)
		6	4,400	2,229	(19,231)
		7	4,840	2,189	(17,042)
		8	5,324	2,150	(14,891)
		9	5,856	2,112	(12,779)
		10	6,442	2,074	(10,705)
		11	7,086	2,037	(8,668)
		12	7,795	2,001	(6,667)
		13	8,574	1,965	(4,702)
		14	9,432	1,930	(2,772)
		15	10,375	1,895	(877)
		16	11,412	1,862	985
		17	12,554	1,828	2,813
		18	13,809	1,796	4,609
		19	15,190	1,764	6,372
		20	16,709	1,732	8,105
		21	18,380	1,701	9,806
		22	20,218	1,671	11,477
		23	22,240	1,641	13,118
		24	24,464	1,612	14,729
		25	26,910	1,583	16,312
	a	Break Even Number of Years=Years at which Cumulative Present Value =0
		Break Even Number of Years=14+(877/1862)=	14.47
		Break Even Number of Years in nearsest whole number	14
	b	Net Present Value (NPV) =Sum of PV=	16,312
	c	Internal Rate of Return (IRR)	16.45%	(Using IRR function of excel over Cash Flows)