DHAHRAN ROADS

Client delays payment

0 1 2 3 4 5 6 7
BEG 93 END 93 END 94 END 95 END 96 END 97 END 98 END 99 TOTAL
A. INFLOWS:
delay catchup
ADVANCE $25.20
GROSS BILLINGS $11.00 $36.00 $0.00 $88.00 $33.00 $0.00 $168.00
-ADVANCE RECOVERY $1.65 $5.40 $0.00 $13.20 $4.95 $0.00 $25.20
-RETENTION FUND $0.55 $1.80 $0.00 $4.40 $1.65 $0.00 $8.40
=NET BILLINGS $8.80 $28.80 $0.00 $70.40 $26.40 $0.00 $134.40
RETENTION PAYMENT $4.20 $4.20 $0.00 $8.40
TOTAL RECEIPTS $25.20 $8.80 $28.80 $0.00 $70.40 $30.60 $4.20 $0.00 $168.00

B. OUTFLOWS:

EQUIPMENT $28.50 $9.50 $38.00

OPERATING COST $7.00 $25.00 $29.00 $27.00 $20.00 $0.00 $108.00
TOTAL DISBURSEMENTS $28.50 $16.50 $25.00 $29.00 $27.00 $20.00 $0.00 $0.00 $146.00

C. NET CASH FLOW ($3.30) ($7.70) $3.80 ($29.00) $43.40 $10.60 $4.20 $0.00 $22.00

HURDLE RATE 18%

IRR 26%
NPV $3.8278
DHAHRAN ROADS

Base case
0 1 2 3 4 5 6 7
BEG 93 END 93 END 94 END 95 END 96 END 97 END 98 END 99
A. INFLOWS:

ADVANCE $25.20
GROSS BILLINGS $11.00 $36.00 $45.00 $43.00 $33.00 $0.00
-ADVANCE RECOVERY $1.65 $5.40 $6.75 $6.45 $4.95 $0.00
-RETENTION FUND $0.55 $1.80 $2.25 $2.15 $1.65 $0.00
=NET BILLINGS $8.80 $28.80 $36.00 $34.40 $26.40 $0.00
RETENTION PAYMENT $4.20 $4.20 $0.00
TOTAL RECEIPTS $25.20 $8.80 $28.80 $36.00 $34.40 $30.60 $4.20 $0.00

B. OUTFLOWS:

EQUIPMENT $28.50 $9.50

OPERATING COST $7.00 $25.00 $29.00 $27.00 $20.00 $0.00
TOTAL DISBURSEMENTS $28.50 $16.50 $25.00 $29.00 $27.00 $20.00 $0.00 $0.00

C. NET CASH FLOW ($3.30) ($7.70) $3.80 $7.00 $7.40 $10.60 $4.20 $0.00

HURDLE RATE 18%

IRR 41%
NPV $7.1701
TOTAL

$168.00
$25.20
$8.40
$134.40
$8.40
$168.00

$38.00
$108.00
$146.00

$22.00
DHAHRAN ROADS

Negotiate 5% lower price but 25% advance payments

0 1 2 3 4 5 6 7
BEG 93 END 93 END 94 END 95 END 96 END 97 END 98 END 99 TOTAL
A. INFLOWS:

ADVANCE $39.90
GROSS BILLINGS $10.45 $34.20 $42.75 $40.85 $31.35 $0.00 $159.60
-ADVANCE RECOVERY $2.61 $8.55 $10.69 $10.21 $7.84 $0.00 $39.90
-RETENTION FUND $0.52 $1.71 $2.14 $2.04 $1.57 $0.00 $7.98
=NET BILLINGS $7.32 $23.94 $29.93 $28.60 $21.95 $0.00 $111.72
RETENTION PAYMENT $3.99 $3.99 $0.00 $7.98
TOTAL RECEIPTS $39.90 $7.32 $23.94 $29.93 $28.60 $25.94 $3.99 $0.00 $159.60

B. OUTFLOWS:

EQUIPMENT $28.50 $9.50 $38.00

OPERATING COST $7.00 $25.00 $29.00 $27.00 $20.00 $0.00 $108.00
TOTAL DISBURSEMENTS $28.50 $16.50 $25.00 $29.00 $27.00 $20.00 $0.00 $0.00 $146.00

C. NET CASH FLOW $11.40 ($9.19) ($1.06) $0.93 $1.60 $5.94 $3.99 $0.00 $13.60

HURDLE RATE 18%

IRR Err:523 NPV will never be negative, so no IRR exists.
NPV $8.31
DHAHRAN ROADS - Borrowing Analysis with Kd=Rf

BASE CASE: NO DEBT, 18% EQUITY COST

0 1 2 3 4 5 6 7
BEG 93 END 93 END 94 END 95 END 96 END 97 END 98 END 99
A. INFLOWS:
ADVANCE $25.20
GROSS BILLINGS $11.00 $36.00 $45.00 $43.00 $33.00 $0.00
-ADVANCE RECOVERY $1.65 $5.40 $6.75 $6.45 $4.95 $0.00
-RETENTION FUND $0.55 $1.80 $2.25 $2.15 $1.65 $0.00
=NET BILLINGS $8.80 $28.80 $36.00 $34.40 $26.40 $0.00
RETENTION PAYMENT $4.20 $4.20
TOTAL RECEIPTS $25.20 $8.80 $28.80 $36.00 $34.40 $30.60 $4.20 $0.00
B. OUTFLOWS:
EQUIPMENT $28.50 $9.50
OPERATING COST $7.00 $25.00 $29.00 $27.00 $20.00 $0.00
TOTAL DISBURSEMENTS $28.50 $16.50 $25.00 $29.00 $27.00 $20.00 $0.00 $0.00
C. OPERATING PROFITS (CF): ($3.30) ($7.70) $3.80 $7.00 $7.40 $10.60 $4.20 $0.00

PV (all future CF) @ 18% 10.47 20.05 19.86 16.44 12.00 3.56
NPV= PV(future CF)+time 0 CF $7.1701

NPV using Excel function: $7.1701 requires same discount rate for each year

PV (CF in year t) -$3.30 -$6.53 $2.73 $4.26 $3.82 $4.63 $1.56

NPV = sum above row $7.1701

WACC CALCULATION:
0 1 2 3 4 5 6
Borrowed amount $4.00 0 0 0 0 0 0
Principal repayment 0 $0.80 $0.80 $0.80 $0.80 $0.80 0
Cumulative Debt Level $4.00 $3.20 $2.40 $1.60 $0.80 $0.00 $0.00
Debt/PV of Project future CF 38.20% 15.96% 12.08% 9.73% 6.67% 0.00% 0.00%
Equity/PV of Project future CF 61.80% 84.04% 87.92% 90.27% 93.33% 100.00% 100.00%
Interest Rate 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
Unlevered Equity Cost (given) 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
Riskfree rate (assume) 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
Market risk premium (assume) 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Unlevered Beta (plug) 0.75 0.75 0.75 0.75 0.75 0.75 0.75
Levered Equity Beta 1.21 0.89 0.85 0.83 0.80 0.75 0.75
Levered Equity Cost 21.71% 19.14% 18.82% 18.65% 18.43% 18.00% 18.00%
WACC 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
FREE CASH FLOWS (=unlevered CF) ($3.30) ($7.70) $3.80 $7.00 $7.40 $10.60 $4.20
PV (future FREE CASH FLOW) $10.47 $20.05 $19.86 $16.44 $12.00 $3.56 $0.00

NPV $7.17 <should be same as basecase; no gains from leverage if no taxes>

IRR 41% <note WACC does not change - Modigliani/Miller (MM) say so!>

FLOW-TO-EQUITY Approach

a.NET CASH FLOW (to SH) base case ($3.30) ($7.70) $3.80 $7.00 $7.40 $10.60 $4.20
b.Amount borrowed $4.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
c.Debt repayed $0.00 $0.80 $0.80 $0.80 $0.80 $0.80 $0.00
d.Interest payments $0.00 $0.48 $0.38 $0.29 $0.19 $0.10 $0.00
e. CF to equity (e=a+b-c-d) $0.70 ($8.98) $2.62 $5.91 $6.41 $9.70 $4.20
Cost of levered equity for that year 21.71% 19.14% 18.82% 18.65% 18.43% 18.00% 18.00%
PV (future CF to equity) 6.47 16.85 17.46 14.84 11.20 3.56
NPV $7.1701
IRR 56% <Note IRR greater but same NPV!>