International Project Finance

A. Sims Industries, Inc. is considering two machines to replace an old machine. Machine A
has a life of 10 years, will cost $24,500, and will produce net cash savings of $4,800 per
year. Machine B has an expected life of 5 years, will cost $20,000, and will produce net
cash savings in operating costs of $6,000 per year. The company’s cost of capital is 14
percent. Which of the two projects would you prefer?

B. ABC Company is considering a project with an initial cost of $5,000 and net cash flows
of $2,000 for next three years. The expected abandonment cash flows for years 0, 1, 2,
and 3 are $5,000, $3,000, $2,500, and $0. The firm’s cost of capital is 10 percent.
Compute the NPC for the three case

a) Complete the table below ticking off the relevant phase for each risk.

Type of risk Pre-completion Post- Risks common Coverage

phase completion to both phases method
phase
Activity planning
risk
Market risk
Exchange rate risk
Operating risk
Interest rate risk
Technological risk
Inflation risk
Construction and/or
completion risk
Supply risk

The pre completion phase risk: Risks that the SPV facesat the beguining of the project.

- Activity planning risk

- Technological risk
- Construcyion risk orcompletion risk
The postcompletion phase risk : Risksfaced by the SPV at the end of the project( operating -
phase)

- Supply risks
- Operating risks
- Demand risks

The risks found in both the pre and postcompletion phases : Risks that arise duringthe life of
the project. Those are macroeconomic and financial variables :

-Inflation

-Exchange rate

-Interest rate