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    FM Assignment - 1

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    Sania Mirza
    The local authority is privatizing the bus network and seeking a loan to support initial investment. A financial model is required to calculate the net present value (NPV), internal rate of return (IRR), and fare increase needed for break even of the proposed 10-year project. Assumptions include annual ridership of 15 million, starting fare of 1.5 currency units, cost assumptions, investment amounts, depreciation rates, a 12 million loan at 10% interest over 10 years, and a 15% discount rate. The model will help determine if the project merits further analysis.

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    FM Assignment - 1

    Uploaded by

    Sania Mirza
    152 views2 pages
    The local authority is privatizing the bus network and seeking a loan to support initial investment. A financial model is required to calculate the net present value (NPV), internal rate of return (IRR), and fare increase needed for break even of the proposed 10-year project. Assumptions include annual ridership of 15 million, starting fare of 1.5 currency units, cost assumptions, investment amounts, depreciation rates, a 12 million loan at 10% interest over 10 years, and a 15% discount rate. The model will help determine if the project merits further analysis.

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    The local authority is privatizing the bus network and seeking a loan to support initial investment. A financial model is required to calculate the net present value (NPV), internal rate of return (IRR), and fare increase needed for break even of the proposed 10-year project. Assumptions include annual ridership of 15 million, starting fare of 1.5 currency units, cost assumptions, investment amounts, depreciation rates, a 12 million loan at 10% interest over 10 years, and a 15% discount rate. The model will help determine if the project merits further analysis.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    152 views2 pages

    FM Assignment - 1

    Uploaded by

    Sania Mirza
    The local authority is privatizing the bus network and seeking a loan to support initial investment. A financial model is required to calculate the net present value (NPV), internal rate of return (IRR), and fare increase needed for break even of the proposed 10-year project. Assumptions include annual ridership of 15 million, starting fare of 1.5 currency units, cost assumptions, investment amounts, depreciation rates, a 12 million loan at 10% interest over 10 years, and a 15% discount rate. The model will help determine if the project merits further analysis.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 2

    Financial Modelling Assignment 1

    Marks 10
    Due date November 12, 2017

    BACKGROUND
    A local authority in an East European city is looking at privatizing the bus network. The proposed new
    company will take over the existing assets from the authority and will invest heavily in modernizing the
    bus fleet and in the infrastructure (bus station, depot, bus stops and shelters, signage, etc.). A central
    government grant has been made available, and the sponsor is seeking a loan to support the initial
    investment. A base case financial model is required to test the underlying robustness of the business
    case; the results will determine if the project has sufficient merit to require further analysis.

    Objective
    You are to prepare a financial model to calculate:
    a) the net present value (NPV) and
    b) the internal rate of return (IRR) of the project
    c) the required increase in basic fare in order to achieve break even (NPV = 0)

    The project sponsor uses a nominal discount rate of 15%. It may be helpful to prepare basic financial
    statements, but these are not seen as necessary at this stage.

    Assumptions
    The project sponsor has provided the following assumptions. At this stage, assume that everything is in
    the local currency (LCU), and that inflation will be applied to the forecast assumptions unless otherwise
    indicated:

    Forecast period should be 10 years, starting next year.


    There are 15,000,000 journeys each year.
    The average fare for next year is LCU 1.5
    Growth is forecast at 5% each year (applicable on fare only).
    The central government subsidy is LCU 200,000 each year.

    Operating costs are simplified as follows:


    Variable costs: LCU 0.5/journey.
    Fixed costs: LCU 5,000,000 each year.
    Local council rates are LCU 100,000 each year.
    Transfer of existing assets of LCU 20,000,000 (investment to be done now)
    Investment in new bus fleet: LCU 1,000,000 in the first 2 years, decreasing to LCU 500,000 for the
    remaining 8 years.
    Investment in infrastructure: LCU 10,000,000 in the first 2 years, decreasing to LCU 1,000,000 for the
    remaining 8 years.
    Depreciation uses the declining balance method, with the following rates:
    Existing assets: 15% per year.
    Fleet: 20% per year.
    Infrastructure: 10% per year.
    The proposed financing is a term loan, of LCU 12,000,000, drawn down at the start of year 1.
    The loan will be repaid over 10 years, with an annual interest rate of 10%.
    The tax rate is 30%; in the case of losses, assume zero tax.
    Financial Modelling Assignment 1
    Marks 10
    Due date November 12, 2017
    The project sponsor uses a nominal discount rate of 15%.
    (Please note that interest and loan payments are not to be considered in calculating NPV)

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