Financial Analysis of Smart Construction Bridge Project Report

This report provides a comprehensive financial analysis of a bridge construction project undertaken by Smart Construction Company under a Build, Operate, and Transfer (BOT) agreement with the New South Wales government. The analysis assesses two scenarios: outsourcing the repair and construction of the bridge versus not outsourcing. It evaluates the financial implications of each option, including cost breakdowns, funding sources (government payments, loans, and REIT), and the impact of a cyclone-related delay. The report conducts a detailed financial analysis, calculating key metrics like Annual Rate of Return (ARR), Net Present Value (NPV), and Internal Rate of Return (IRR) to determine the most financially viable approach. The analysis considers the initial construction costs, additional costs due to damages, and the impact on the project's profitability. The report concludes with a recommendation on the preferred course of action based on the financial projections and other considerations such as environmental sustainability.

Contents
Part B.....................................................................................................................................................2
Background............................................................................................................................................2
Scenario A: Outsourcing the Repairs and Construction of the Bridge...................................................2
Pros........................................................................................................................................................3
Alternative B : Not Out Sourcing......................................................................................................4
Pros....................................................................................................................................................5
Cons...................................................................................................................................................5
Cost Related Analyses.......................................................................................................................5
Part C Financial Analysis......................................................................................................................6
Assumptions......................................................................................................................................6
Funding.................................................................................................................................................6
Part B Loan........................................................................................................................................7
Additional Funding............................................................................................................................8
Setting Up an REIT.........................................................................................................................10
Revenues.........................................................................................................................................10
Outflows..........................................................................................................................................10
Costs incurred......................................................................................................................................12
Operating Costs...................................................................................................................................12
5. Financial Analysis..........................................................................................................................13
5.1 Costs of Goods Sold..................................................................................................................13
5.2 Profits and Profits After Tax......................................................................................................14
Annual Rate of Return (ARR).........................................................................................................15
5.4 Net Present Value......................................................................................................................15
5.5 Internal Rate of Return..............................................................................................................15
Other Considerations For Analysis:.....................................................................................................18
Environmental Sustainability...............................................................................................................18

Part B
Background
The given bridge is being built by Smart construction Company under the build , Operate and
transfer agreement with the government of New South Wales. The Government of New
South Wales has agreed to pay Smart construction Company AUD100 million for the bridge
and will alow Smart Construction Company to operate the bridge for a holding period of 10
years. During the 10 years, Smart construction will operate the bridge, incur all the
operational costs. Smart construction will also, operate the toll post at the bridge and will be
allowed to collect a toll fee from every vehicle that makes use of the bridge. Smart Company
has the right to make all decisions regarding the operation of the bridge , subject to
limitations set by the NSW government. The revenues from the toll fee will be shared by the
NSW government and Smart Construction. The Bridge, under construction has an estimated
construction cost of AUD 320,000,000 and approximately 60% of the construction work was
completed. A cyclone caused damage worth AUD 120,000 and delayed the completion of the
project by four months. The company has two alternatives
Scenario A: Smart Construction could outsource part of the project to other reputed Company
and allow for the project to be completed on time,. This will increase the costs but will help
the Company start earning revenues earlier, helping reduce the payback period.
Scenario B: Smart Construction could seek an extension of time for the project and complete
the construction. The damages of AUD 120,000 would stil. be incurred by Smart construction
by the rest of the cost projections will be the same. This will be the least expensive option but
could jeopardise the project due to the delay in construction
This part of the report assess the financial costs, especially accounting for the damages as will
as provides some financial analysis to understand the current financial returns on investment
in the bridge.
Scenario A: Outsourcing the Repairs and Construction of the Bridge
While Smart Projects has the experience of construction of bridges in Australia, the changing
dynamics of the climate would require calling in experts from Ae7 Private Limited, a
construction Company based out of Dubai. The Company has built high value projects like
bridges on the water Canal road and several other public infrastructure projects. The
Company has quoted a cost price of AUD 159,000,000 for repairs. This includes using pre-

cast concrete blocks to replace the current concrete work on the bridge and the repair of the
suspension. It is possible for Smart Construction Private Limited to keep working while Ae7
continues to repair the Bridge. However, the Company has realized the importance of pre-
cast concrete to improve the structural integrity of the bridge and has decided to use that
material, instead of the current concrete being used. Additionally, greater investment will be
used for better materials, as directed by the NSW government.
Figure 1Work Break Down Structure
The non-cost related pros and cons are as follows
Pros:
 The construction of the bridge will be completed on time, providing the Company a
chance to uphold its reputation and relationship with the Government Of New South
Wales
Bridge
Connex
Completed
(60% - Damages)
(AUD 192,000,000
- 120,000,000)
i,e AUD 180,000,000
Foundation
(100%) Cable
Anchorages
(10%)
Work To Be Completed
Repairs + 40%
AUD (159+ 128,000,000)
= AUD 287,000,000
Repairs
(Part of
Foundation)
Construction
of Road)

 Outsourcing the construction will also, benefit the project by way of knowledge
transfer. Ae7 has plenty of experience in building bridges such as this one and
working with Ae7, may help Smart Construction Private Limited identify other
shortcomings in the bridge or understand smarter ways of building and operating the
bridge. This might help improve the quality of construction and help in the overall
construction and operation of the bridge. For example, at the suggestion of Ae7,
Smart Construction has decided to use Solar LED based lamps , instead of regular
lighting for the bridge, This could help reduce the operational costs of bridge but
reducing the electricity consumption by anywhere between 10% - 35%. In addition,,
the Company can also consider Carbon financing later for the bridge.
Cons:
 There might be inconsistencies in the structure and quality of the bridge due to
two different firms operating on the same project.
 There could be inconsistencies since the firm would lack experience of building
infrastructure projects in Australia.
Table 1 Total Costs Outflows for the Bridge, In case of Scenario A
Alternative A:
Outsourcing
Total Additional Costs to be Incurred 387000000
Month 1 32000000
Month 2 32000000
Month 3 32000000
Month 4 32000000
Month 5 32000000
Month 6 32000000
Month 7 77400000
Month 8 77400000
Month 9 77400001
Month 10 77400002
Month 11 77400003

Total Costs to be
Incurred
579000006
Scenario B : Not Out Sourcing the Maintenance and Repairs of the Bridge
Smart Construction can seek an additional four months and complete the project within 15
months, instead of the previously estimated 11 months. The Company will still incur the costs
for repairing the damage of AUD 120,000. The Company has also, decided to seek better
quality materials and processes so that a cyclone would not cause serious damages to the
bridge, again. Hence, the Company has decided to invest more and the total expected
expenditure owing to the improvement in the quality is $248,000,000
Table 2 Total Cash Outflows during the Build Phase of the Operation
Alternative B: Not Outsourcing Total Costs (AUD)
Total Costs Yet to be Incurred : AUD 368000000
Month 1 32000000
Month 2 32000000
Month 3 32000000
Month 4 32000000
Month 5 32000000
Month 6 32000000
Month 7 38666666.67
Month 8 38666666.67
Month 9 38666666.67
Month 10 38666666.67
Month 11 38666666.67
Month 12 38666666.67
Month 13 38666666.67
Month 14 38666666.67
Month 15 38666666.67
Total Costs to be Incurred 385333333.333

Non- Cost Related Pros and Cons of Scenario B
Pros
There will be uniformity in the quality of construction, ensuring that the standards of the
Company are met.
Cons
The form will have to seek and extension from the NSW government. This could damage the
reputation of the firm as well as jeopardise the possibility of contracting future project with
the Government of NSW
Cost Related Analyses: Choosing an Alternative
As mentioned earlier, 60% of the expected expenditure has been expended. Additional
expenditure was compared and the results are as follows:
Project Costs (in AUD)
AUD value of Project completed (60%) 192000000 192000000
AUD value of Project Left 128000000 128000000
Additional Costs (To be fulfilled for
Cyclone) 159,000,000 120,000,000
Additional Costs(for improvement of
project) 20,000,000
Total Additional Costs 460000000
Expenditure Above The original
Estimated Costs 159000000 140000000
Percentage increase in Project Costs 49.6875 43.75
The damages related to the cyclone have resulted with an increase in the project costs by 43%
at the minimum and 49% at the maximum. The initial evaluation of the project had margins
for an increase in the evaluation by 7%. On its own, scenario B will cost slightly less than 6%
of an increase in costs. It will offer additional benefits. Hence, scenario A i.e. Outsourcing the
repair and maintenance of the project has been chosen.

Part C Financial Analysis
Assumptions
 The Operational Costs of the Project will not change much
 There was no insurance taken for the project in the past. Hence, the Company
will receive no insurance payout to cover the cost of the damages.
 There is no depreciation of Capital on the bridge while building since the project is
supposed be completed in 11 months.
 Interest rates on all loans are fixed, with yearly compounding, and were known at the
time of the tender.
 Assume that all annual increases in toll will occur on the anniversary of the opening
of the bridge or at the end of a financial year. Annual increases will not occur not on
the new calendar year.
Funding
 . In this case for the Build, Operate and Transfer Project, the NSW government will
allow Smart Construction Private Limited to build and operate a toll for a holding
period of 10 years, apart from AUD $100 million payment that Smart Construction
Limited will be paid for building the project.
According to this framework, the Government has paid 10% of the sum to be paid at
the beginning of the project, 55% of the total amount over construction of the project
and 35% of the amount due upon the construction of the project.
Funding - Part A: Payment by New South Wales Government
The New South Wales had agreed to the following payment schedule, as a part of the contract
in January 2018.
Table 3 Payment Schedule from New South Wales
Total (in AUD) % of Total
Cost
Month 0 1000000 10
Month 1 500,000 5
Month 2 500,000 5
Month 3 500,000 5

Month 4 500,000 5
Month 5 500,000 5
Month 6 500,000 5
Month 7 500,000 5
Month 8 500,000 5
Month 9 500,000 5
Month 10 500,000 5
Month 11 500,000 5
Completion 3,500,000 35
Total 10000000 100
Funding - Part B: Loan
 As mentioned earlier, the initial costs estimated for the Bridge were at AUD 320,
000,000. According to initial estimates, approximately AUD 220,000,000 were to be
secured by Smart Construction for completion of the project, from various sources.
Smart Construction managed to secure a loan from the ICICA Infrastructure Funding
Corporation. Smart Construction was to finance the project by borrowing under two
loans. One loan was secured against the operating income. That is, monthly
repayments were to be paid out of the net operating income. A second loan was
obtained by made by the parent company and is ‘psuedo’ Equity. It will be lent to the
RDC by the parent Company Smart Construction Company at the prevalent rate. This
loan will be used to fund the purchase of the project and any upfront expenses, net of
other loan proceeds. All net cash at the end of each month will be used by the RDC to
repay the equity loan. Any surplus cash after the presumed Sale of the project and
repayment of any loans, will also be used to repay the equity loan
The required funding for expected to be obtained as below
Table 4 Loan Payments
Year Principal Interest Total Payment
2018 1,09,29,442.71 86,10,165.63 1,95,39,608.34
2019 1,72,33,992.68 1,20,75,419.8
3
2,93,09,412.51

2020 1,82,96,947.64 1,10,12,464.8
7
2,93,09,412.51
2021 1,94,25,463.33 98,83,949.18 2,93,09,412.51
2022 2,06,23,583.41 86,85,829.11 2,93,09,412.51
2023 2,18,95,600.90 74,13,811.61 2,93,09,412.51
2024 2,32,46,073.66 60,63,338.86 2,93,09,412.51
2025 2,46,79,840.61 46,29,571.90 2,93,09,412.51
2026 2,62,02,039.18 31,07,373.33 2,93,09,412.51
2027 2,78,18,123.62 14,91,288.89 2,93,09,412.51
2028 96,48,892.24 1,20,911.93 97,69,804.17
Funding Part C: Additional Funding
The increase in costs brought about due to the cyclone has necessitated raising additional
capital. Smart construction has decided that it will minimize its risks by raising capital
through an REIT in order to be less burdened by loans. However, the REIT may not be able
to raise the complete amount given today’s macro economic climate. Hence, Smart
Construction will provide a loan of AUD 109 million to RDC, in order to be able to fund the
project. The terms and conditions and payment structure will be the same as the loan from
ICICA. The loan will have monthly instalments starting May 2018 and the payment schedule
will be as given in the table below.
Table 5 Loan Payments for Loan Funded by Smart Construction
Year Principal Interest Total Payment Balance Loan Paid To
Date
(A) (B) (A + B)
2018 54,15,042 42,65,946 96,80,988 10,35,84,958 4.97%
2019 85,38,660 59,82,822 1,45,21,482 9,50,46,298 12.80%

2020 90,65,306 54,56,176 1,45,21,482 8,59,80,992 21.12%
2021 96,24,434 48,97,048 1,45,21,482 7,63,56,558 29.95%
2022 1,02,18,048 43,03,434 1,45,21,482 6,61,38,510 39.32%
2023 1,08,48,275 36,73,207 1,45,21,482 5,52,90,235 49.28%
2024 1,15,17,373₹ 30,04,109₹ 1,45,21,482₹ 4,37,72,862₹ 59.84%
2025 1,22,27,739₹ 22,93,742₹ 1,45,21,482₹ 3,15,45,123₹ 71.06%
2026 1,29,81,919₹ 15,39,562₹ 1,45,21,482₹ 1,85,63,203₹ 82.97%
2027 1,37,82,616₹ 7,38,866₹ 1,45,21,482₹ 47,80,588₹ 95.61%
2028 47,80,588₹ 59,906₹ 48,40,494₹ 0₹ 100.00%

Setting Up an REIT
 To isolate risk, the Company can form an infrastructure REIT called Road
Development Company (RDC) , which would be a subsidiary of Smart Construction
Company Limited and would be floated on the Sydney Stock Exchange. The REIT
could also seek other financing . RDC’s only assets will be infrastructure projects
above the value of AUD200 million and any relevant agreements. The RDC will sell
shares to the project, in lieu of cash.. For the initial round, REIT could seek funding of
AUD 50 million.
 If the REIT is unable to meet its targets, Smart construction will provide further loans
to cover the deficit amount. However, if the REIT exceeds its target, the excess
amount will go towards repayment of the loan provided by Smart Construction.
 The total funding through the REIT will not be greater than 5% of the total valuation
of the project.
Revenues
 In this case, the Government is planning to introduce the toll for the bridge it will be
called BridgeConnex. The Government has allowed for a revenue sharing model that
will allow the Company to share the revenues
 Significant revenues will be obtained from tolls. According to the Government
estimates of traffic volume approximately 100,000 vehicles use the road every day.
Based on several calculations including season pass and other concessions and levies,
the average revenue is expected to be $3.50 per vehicle. The NSW government has
capped a maximum individual vehicle toll initially, making allowance for a maximum
annual increase in the levy of 3% as a part of the Contract.
 RDC will be responsible for the operation of the toll, repair and maintenance of the
road as well as other expenses. The revenue sharing model will be 66% gross
revenues will be retained by RDC while 34% of the revenues will be transferred to the
NSW government. The total revenues accrued from a given month should be paid off
to the government, at most, by the 10th of the following month.
 Government estimates suggest that for the first five years, an average of 100,000
vehicles will use the services. However, based on some market research government
estimates in the first year, 90% of the government estimates in the second year and is
expected to average at the government estimates of 100,000 vehicles over the life of