The case study “Dhahran roads” will be uploaded to my personal account. answer these questions regarding the case and discuss ‘sensitivity test’
1. Calculate the NPV and IRR of the project. Should SADE accept the project? Which rate did you use to discount the project’s future cash flows? Explain your choice.
2. The base case scenario described in the case study is in fact an optimistic scenario it implicitly assumes that everything goes according to plan. However, the economic viability of the project could be sensitive to changes in assumptions. The managers of SADE therefore decided to map out the risks to which the project is exposed and prepared additional scenarios. Calculate the NPV and IRR of the project under each of these scenarios
a. Loss of full retention
b. Loss of final retention payment
c. Operating cost increase of 10%
d. Operating cost decrease of 5%
e. Equipment cost increase of 10%
f. Advanced pay decreased to 10% of the contract’s total value
3. Which rate did you use to discount the future cash flows under the alternative scenarios? Explain your choice.
4. Summarize the results obtained in (1) and (2) and comment on the results.
5. Do you think the cost of the loans offered to SADE (12%) include a consideration for risk? Explain.
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