DHAHRAN ROADS

Client delays payment

0
BEG 93

1
END 93

2
END 94

3
END 95

4
END 96

delay

catchup

5
END 97

6
END 98

$33.00
$4.95
$1.65
$26.40
$4.20
$30.60

$0.00
$0.00
$0.00
$0.00
$4.20
$4.20

7
END 99 TOTAL

A. INFLOWS:
ADVANCE
GROSS BILLINGS
-ADVANCE RECOVERY
-RETENTION FUND
=NET BILLINGS
RETENTION PAYMENT
TOTAL RECEIPTS

$25.20
$11.00
$1.65
$0.55
$8.80

$36.00
$5.40
$1.80
$28.80

$0.00
$0.00
$0.00
$0.00

$88.00
$13.20
$4.40
$70.40

$25.20

$8.80

$28.80

$0.00

$70.40

EQUIPMENT
OPERATING COST
TOTAL DISBURSEMENTS

$28.50
$28.50

$9.50
$7.00
$16.50

$25.00
$25.00

$29.00
$29.00

$27.00
$27.00

$20.00
$20.00

C. NET CASH FLOW

($3.30)

($7.70)

$3.80

($29.00)

$43.40

$10.60

$0.00
$0.00

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

$0.00
$0.00

$0.00

$38.00
$108.00
$146.00

$4.20

$0.00

$22.00

B. OUTFLOWS:

HURDLE RATE
IRR
NPV

18%
26%
$3.8278

DHAHRAN ROADS
Base case
0
BEG 93

1
END 93

2
END 94

3
END 95

4
END 96

5
END 97

6
END 98

7
END 99

$11.00
$1.65
$0.55
$8.80

$36.00
$5.40
$1.80
$28.80

$45.00
$6.75
$2.25
$36.00

$43.00
$6.45
$2.15
$34.40

$0.00
$0.00
$0.00
$0.00
$4.20
$4.20

$0.00
$0.00

A. INFLOWS:
ADVANCE
GROSS BILLINGS
-ADVANCE RECOVERY
-RETENTION FUND
=NET BILLINGS
RETENTION PAYMENT
TOTAL RECEIPTS

$25.20

$25.20

$8.80

$28.80

$36.00

$34.40

$33.00
$4.95
$1.65
$26.40
$4.20
$30.60

EQUIPMENT
OPERATING COST
TOTAL DISBURSEMENTS

$28.50
$28.50

$9.50
$7.00
$16.50

$25.00
$25.00

$29.00
$29.00

$27.00
$27.00

$20.00
$20.00

$0.00
$0.00

$0.00

C. NET CASH FLOW

($3.30)

($7.70)

$3.80

$7.00

$7.40

$10.60

$4.20

$0.00

B. OUTFLOWS:

HURDLE RATE
IRR
NPV

18%
41%
$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
BEG 93 END 93
A. INFLOWS:
ADVANCE
GROSS BILLINGS
-ADVANCE RECOVERY
-RETENTION FUND
=NET BILLINGS
RETENTION PAYMENT
TOTAL RECEIPTS

2
END 94

3
END 95

4
END 96

5
END 97

6
END 98

$34.20
$8.55
$1.71
$23.94

$42.75
$10.69
$2.14
$29.93

$40.85
$10.21
$2.04
$28.60

$0.00
$0.00
$0.00
$0.00
$3.99
$3.99

7
END 99 TOTAL

$39.90
$10.45
$2.61
$0.52
$7.32
$39.90

$7.32

$23.94

$29.93

$28.60

$31.35
$7.84
$1.57
$21.95
$3.99
$25.94

$0.00
$0.00

$159.60
$39.90
$7.98
$111.72
$7.98
$159.60

EQUIPMENT
OPERATING COST
TOTAL DISBURSEMENTS

$28.50
$28.50

$9.50
$7.00
$16.50

$25.00
$25.00

$29.00
$29.00

$27.00
$27.00

$20.00
$20.00

$0.00
$0.00

$0.00

$38.00
$108.00
$146.00

C. NET CASH FLOW

$11.40

($9.19)

($1.06)

$0.93

$1.60

$5.94

$3.99

$0.00

$13.60

B. OUTFLOWS:

HURDLE RATE
IRR
NPV

18%
Err:523 NPV will never be negative, so no IRR exists.
$8.31

DHAHRAN ROADS - Borrowing Analysis with Kd=Rf

BASE CASE: NO DEBT, 18% EQUITY COST

0
BEG 93
A. INFLOWS:
ADVANCE
GROSS BILLINGS
-ADVANCE RECOVERY
-RETENTION FUND
=NET BILLINGS
RETENTION PAYMENT
TOTAL RECEIPTS
B. OUTFLOWS:
EQUIPMENT
OPERATING COST
TOTAL DISBURSEMENTS
C. OPERATING PROFITS (CF):

1
END 93

2
END 94

3
END 95

4
END 96

5
END 97

6
END 98

7
END 99

$11.00
$1.65
$0.55
$8.80

$36.00
$5.40
$1.80
$28.80

$45.00
$6.75
$2.25
$36.00

$43.00
$6.45
$2.15
$34.40

$25.20

$8.80

$28.80

$36.00

$34.40

$33.00
$4.95
$1.65
$26.40
$4.20
$30.60

$0.00
$0.00
$0.00
$0.00
$4.20
$4.20

$0.00

$28.50

$9.50
$7.00
$16.50
($7.70)

$25.00
$25.00
$3.80

$29.00
$29.00
$7.00

$27.00
$27.00
$7.40

$20.00
$20.00
$10.60

$0.00
$0.00
$4.20

$0.00
$0.00

20.05

19.86

16.44

12.00

3.56

$25.20

$28.50
($3.30)

PV (all future CF) @ 18%

NPV= PV(future CF)+time 0 CF

10.47
$7.1701

NPV using Excel function:

$7.1701 requires same discount rate for each year

PV (CF in year t)
NPV = sum above row

-$3.30
$7.1701

-$6.53

$2.73

$4.26

0
$4.00
0
$4.00
38.20%
61.80%
12.00%
18.00%
12.00%
8.00%
0.75
1.21
21.71%
18.00%
($3.30)
$10.47

1
0
$0.80
$3.20
15.96%
84.04%
12.00%
18.00%
12.00%
8.00%
0.75
0.89
19.14%
18.00%
($7.70)
$20.05

2
0
$0.80
$2.40
12.08%
87.92%
12.00%
18.00%
12.00%
8.00%
0.75
0.85
18.82%
18.00%
$3.80
$19.86

3
0
$0.80
$1.60
9.73%
90.27%
12.00%
18.00%
12.00%
8.00%
0.75
0.83
18.65%
18.00%
$7.00
$16.44

$3.82

$4.63

$1.56

WACC CALCULATION:
Borrowed amount
Principal repayment
Cumulative Debt Level
Debt/PV of Project future CF
Equity/PV of Project future CF
Interest Rate
Unlevered Equity Cost (given)
Riskfree rate (assume)
Market risk premium (assume)
Unlevered Beta (plug)
Levered Equity Beta
Levered Equity Cost
WACC
FREE CASH FLOWS (=unlevered CF)
PV (future FREE CASH FLOW)
NPV
IRR

4
5
6
0
0
0
$0.80
$0.80
0
$0.80
$0.00
$0.00
6.67%
0.00%
0.00%
93.33% 100.00% 100.00%
12.00% 12.00% 12.00%
18.00% 18.00% 18.00%
12.00% 12.00% 12.00%
8.00%
8.00%
8.00%
0.75
0.75
0.75
0.80
0.75
0.75
18.43% 18.00% 18.00%
18.00% 18.00% 18.00%
$7.40
$10.60
$4.20
$12.00
$3.56
$0.00

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

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

FLOW-TO-EQUITY Approach
a.NET CASH FLOW (to SH) base case
b.Amount borrowed
c.Debt repayed
d.Interest payments
e. CF to equity (e=a+b-c-d)
Cost of levered equity for that year
PV (future CF to equity)
NPV
IRR

($3.30)
($7.70)
$3.80
$7.00
$7.40
$4.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.80
$0.80
$0.80
$0.80
$0.00
$0.48
$0.38
$0.29
$0.19
$0.70
($8.98)
$2.62
$5.91
$6.41
21.71% 19.14% 18.82% 18.65% 18.43%
6.47
16.85
17.46
14.84
11.20
$7.1701
56% <Note IRR greater but same NPV!>

$10.60
$0.00
$0.80
$0.10
$9.70
18.00%
3.56

$4.20
$0.00
$0.00
$0.00
$4.20
18.00%