Financial assumptions and projections

OTW have identified that they will need to initially purchase five (5) ferries with an upfront investment of $2 million each, that will be depreciated to a zero book value on a straight-line basis over 7 years. Financing for part of the purchase of the 5 ferries will be via a new 7 year debt issue, resulting in interest costs of $35,000 payable at the end of each year. The investment in the 5 ferries will provide adequate capacity to meet the Councils forecasted transport needs over the period of life of the ferries. After this, it is expected that the 5 ferries will have no salvage value and another investment decision will need to made about the ferry systems continued operation.

OTW have paid Harbour Consulting $25,000 to provide the estimates of the costs of the project and provide them with feasibility studies.

OTW have forecast initial sales revenue for year 1 of $15 million and this is expected to grow by 5% in each of the remaining years of the project.

The current estimate for variable costs per annum over the life of the project are forecast to be $8 million per annum. These variable costs include but are not limited to fuel costs, maintenance costs for the ferries and terminals (that will use in-house resources) and wages for casual staff members.

Over the life of the ferries, it is estimated that variable costs will increase by 4% per annum. This increase incorporates any future price increases for fuel, maintenance costs and mandatory government increases to wages for staff.

The fixed costs related to the project are expected to be $4 million dollars per annum. These costs incorporate but not limited to insurances, wages for new permanent staff, advertising costs and other related administrative costs.

Other information:

On the Water Pty Ltd has a 7% weighted average cost of capital and is subject to a 25% tax rate on its income.

Task: Using Scenario Analysis and Sensitivity Analysis to discuss the uncertainty of the project by using the following statement and provide logical recommendations about the risks.

-10,000,000 Year Initial Cash flow(5*2M) Annual Cash flow: Sales Revenue Various Costs Fixed Costs Depreciation(10M/7) e=a+b+c+d Operating profit before tax f=e*(1-0.25) Profit after tax Add Depreciation h=f+g After tax cash flow CF Net cash flow PV=(CF/1.07N) Present Value 15,000,000 -8,000,000 -4,000,000 -1,428,571 1,571,429 1178571.75 1,428,571 2,607,143 2,607,143 2436582.009 15750000 16537500 -8320000 -8652800 -4,000,000 -4,000,000 -1,428,571 -1,428,571 2,001,429 2,456,129 1501071.75 1842096.75 1,428,571 1,428,571 2,929,643 3,270,668 2,929,643 3,270,668 2558863.438 2669839.14 17364375 18232593.8 19144223.44 20101434.61 -8998912 -9358868.48 -9733223.22 -10122552.1 -4,000,000 -4,000,000 -4,000,000 -4,000,000 -1,428,571 -1,428,571 -1,428,571 -1,428,571 2,936,892 3,445,154 3,982,429 4,550,311 2202669 2583865.7 2986821.914 3412733.596 1,428,571 1,428,571 1,428,571 1,428,571 3,631,240 4,012,437 4,415,393 4,841,305 3,631,2404,012,437 4,415,393 4,841,305 2770255.61 2860811.91 2942162.733 3014921.188 -10,000,000 -10,000,000 SUM PV NPV 9,253,436 -10,000,000 Year Initial Cash flow(5*2M) Annual Cash flow: Sales Revenue Various Costs Fixed Costs Depreciation(10M/7) e=a+b+c+d Operating profit before tax f=e*(1-0.25) Profit after tax Add Depreciation h=f+g After tax cash flow CF Net cash flow PV=(CF/1.07N) Present Value 15,000,000 -8,000,000 -4,000,000 -1,428,571 1,571,429 1178571.75 1,428,571 2,607,143 2,607,143 2436582.009 15750000 16537500 -8320000 -8652800 -4,000,000 -4,000,000 -1,428,571 -1,428,571 2,001,429 2,456,129 1501071.75 1842096.75 1,428,571 1,428,571 2,929,643 3,270,668 2,929,643 3,270,668 2558863.438 2669839.14 17364375 18232593.8 19144223.44 20101434.61 -8998912 -9358868.48 -9733223.22 -10122552.1 -4,000,000 -4,000,000 -4,000,000 -4,000,000 -1,428,571 -1,428,571 -1,428,571 -1,428,571 2,936,892 3,445,154 3,982,429 4,550,311 2202669 2583865.7 2986821.914 3412733.596 1,428,571 1,428,571 1,428,571 1,428,571 3,631,240 4,012,437 4,415,393 4,841,305 3,631,2404,012,437 4,415,393 4,841,305 2770255.61 2860811.91 2942162.733 3014921.188 -10,000,000 -10,000,000 SUM PV NPV 9,253,436