A construction company Y is considering to participate in the tendering process for building a toll...

A construction company Y is considering to participate in the tendering process for building a toll bridge. The duration of the construction project is 5 years. The successful tenderer is allowed to collect toll from the bridge users after the completion of the project and subsequently will be responsible for maintaining the bridge. The expected cash flow transactions from this project are as follows:

Receive bank loan of RM 2,000,000 now
Annual material expenses of RM 200,000 in year 1 and expected to increase by RM 20,000 per year until year 5
Annual bridge maintenance cost of RM 70,000 from year 6 until end of bridge life
Annual bank loan payment of RM 500,000 starting from the first year until at the end of year 10
Progress payment received from the government: RM 4,000,000 (end of year 3) and RM 8,000,000 (end of year 5)
Toll revenue of RM 500,000 per year from year 6 until year 10

a) Construct cash flow diagram to summarize the above transactions.

b) Another company is interested in this project and is willing to buy over this project worth RM 1,500,000 now. Should this offer being accepted? Show all your calculations to justify your decision and assume the growth rate is 12% per year.

Expert Solution

Y COMPANY (a) CASH FLOW FOR THE PROJECT
FROM YEAR 1 TO 10
	In RM
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Toll Revenue						500000	500000	500000	500000	500000
Progress Payment from Government			4000000		8000000
Less :
Annual Maintenance	200000	220000	240000	260000	280000
Annual Birdge Maintenance Cost						70000	70000	70000	70000	70000
Interest on loan
PBT
Less : Tax
PAT
Repayment of loan	500000	500000	500000	500000	500000	500000	500000	500000	500000	500000
Project Cash Flow	-700000	-720000	3260000	-760000	7220000	-70000	-70000	-70000	-70000	-70000
PV Factor - 12%	0.8929	0.7972	0.7118	0.6355	0.5674	0.5066	0.4523	0.4039	0.3606	0.322
Discounted Cash Flow	-625030	-573984	2320468	-482980	4096628	-35462	-31661	-28273	-25242	-22540	4591924

NPV	4591924

(b) The offer should not be accepted as the NPV of the project is RM 4,591,924 where as the offer price was RM 1,500,000

ekkarill92 answered 2 years ago

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