International project appraisal – part 2 Appendix 1 – NPV and Workings

Description Time 0 €m

Time 1 €m

Time 2 €m

Time 3 €m

Time 4 €m

Time 5 €m

Time 6 €m

Revenue (W1)

_____

313.50 _____

368.23 _____

636.01 _____

486.81 _____

389.99 _____

_____

Variable cost (W2) 131.10 156.98 276.40 215.67 176.13

Incremental fixed costs 40.00 42.40 44.94 47.64 50.50

Royalty (W3) 63.44 68.72 109.48 77.29 57.11

TAD (250/5) 50.00 _____

50.00 _____

50.00 _____

50.00 _____

50.00 _____

Total costs _____

284.54 _____

318.10 _____

480.82 _____

390.60 _____

333.73 _____

_____

Taxable cash flows 28.96 50.13 155.19 96.21 56.25

Taxation @ 20% (5.79) (10.03) (31.04) (19.24) (11.25)

Add: TAD 50.00 50.00 50.00 50.00 50.00

Initial investment (1000.00)

Scrap proceeds 500.00

Working capital

(31.35) ______

(5.47) _____

(26.78) ______

14.92 _____

9.68 ______

39.00 ______

______

€m (1031.35) 73.49 67.56 210.08 124.86 626.01 (11.25) Spot rate (W4) €/$ 0.7810 0.7420 0.7049 0.6696 0.6361 0.6043 0.5741

$m $m $m $m $m $m $m

Remitted amounts (1320.55) 99.05 95.84 313.74 196.28 1035.89 (19.60)

Royalty income (W3) 85.50 97.50 163.50 121.50 94.50

Taxation on royalty Income @ 25%

(21.38) (24.38) (40.88) (30.38) (23.63)

Additional tax on € Taxable profits (W5)

_______

(1.95) _____

(3.56) _____

(11.59) ______

(7.56) _____

(4.65) ______

______

Free cash flows (1320.55) 161.22 165.41 424.78 279.84 1102.11 (19.60)

Cost of capital (10%) 1.000 0.909 0.826 0.751 0.683 0.621 0.564

________ ______ ______ ______ ______ ______ ______ Present values ($m)

(1320.55) ________

146.55 ______

136.63 ______

319.01 ______

191.13 ______

684.41 ______

(11.05) ______

Net present value ($m)

+146.13

(W1) Revenue Time 1 Time 2 Time 3 Time 4 Time 5 Metres 5,700 6,500 10,900 8,100 6,300

Price (€) 55,000 ______

56,650 ______

58,350 ______

60,100 _____

61,903 ______

€m 313.50 ______

368.23 ______

636.01 ______

486.81 _____

389.99 ______

(W2) Variable cost Time 1 Time 2 Time 3 Time 4 Time 5 Unit cost 23,000

______ 24,150 ______

25,358 ______

26,625 _____

27,957 ______

Metres x unit cost (€m)

131.10 ______

156.98 ______

276.40 ______

215.67 _____

176.13 ______

(W3) Royalty Time 1 Time 2 Time 3 Time 4 Time 5 Metres x $15,000 ($m) $85.50 $97.50 $163.50 $121.50 $94.50

Spot rate (€/$) – (W4)

€0.7420 ______

€0.7049 ______

€0.6696 ______

€0.6361 ______

€0.6043 ______

€m 63.44 ______

68.72 ______

109.48 ______

77.29 _____

57.11 ______

(W4) Spot rates Time 0

Time 1

Time 2

Time 3

Time 4

Time 5

Time 6

Spot rate (€/$)

€0.7810 €0.7420

€0.7049 €0.6696 €0.6361 €0.6043 €0.5741

(W5) Additional taxation Time 1 Time 2 Time 3 Time 4 Time 5 €m €m €m €m €m Taxable profit 28.96 50.13 155.19 96.21 56.25 (25–20)% x Taxable Profit (1.45) (2.51) (7.76) (4.81) (2.81)

Spot Rate (€/$) – W4 €0.7420 ______

€0.7049 ______

€0.6696 ______

€0.6361 ______

€0.6043 ______

$m (1.95) ______

(3.56) ______

(11.59) ______

(7.56) ______

(4.65) ______

To: BoD of Penn Co From: xxxxxx Subject: Nurukian Train Line Project Date: xx-xx-xx ------------------------------------------------------------------------------- Financial assessment I have prepared a forecast of the nominal free cash flows for the Nurukian train line project in Appendix (1). After discounting these at the Penn Co’s current cost of capital (10%), the project increases shareholder wealth by just under $150m. Based on this value, the company should accept this project. All forecasts are subject to estimation errors. This should be taken into account when the BoD arrives at its final decision. Assumptions There are a number of assumptions that have been made when computing the NPV. Some of these are considered below:

• Inflation – specific inflation rates have been incorporated into the appraisal and are expected to remain constant for the five-year period.

• Taxation – the current tax rates and allowances used to arrive at the taxation cash flows may vary over the life of the project.

• Scrap proceeds – the Nuruk government have guaranteed to purchase the machinery for a value of €500m. This may be subject to the condition of the machine as there will be wear and tear.

• Exchange rates – future spot rates are affected by many factors and, hence, the values used in the assessment may be incorrect.

• Finance – the project requires €1,000m ($1280m) initial finance. It has been assumed that this will be raised in the Ayjain financial markets. This is a large value relative to the company’s current entity value. The project may be too big for Penn Co to undertake.

Sensitivity analysis should be carried out to identify how changes in key variables affect the NPV.