Foreign direct investment project, Financial Econometrics

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The new investment has been under consideration since the beginning of January 2008 when the new government of Gujistan first invited companies to submit their proposals to build and run a large power station in the country. The invitation to tender stipulated that the project would be for an initial period of 10 years, and then subject to a satisfactory review by the Office of the Independent energy regulator (similar to OFGEN in the UK) for an indefinite period of time.

Coincidently, PASE plc policy is to appraise investment projects over a 10 year period, and then to assume that the after-tax sterling operating cash flows will grow at a constant rate of 5 percent per annum indefinitely. . The company had spent £1 million in the preparation of its own submission.

The following details were prepared in 2009 and the first year of operation and construction is 2010.  The company's policy is for surplus cash flows to be remitted to the UK at the end of each year. The project-team at PASE plc which prepared the initial bid for the project estimated that the total cost of the project will amount to G$900 million in plant and other equipment. The project will take two years to construct, with 65 percent of the project cost incurred in the first year of construction. In addition to the total project cost, an additional investment of G$75 million in 2010 would be required for working capital. Funding for the project will come from the UK. The policy of Gujistan's government is to allow investment in plant and equipment for this type of projects to be depreciated for tax purposes at the rate of 50 percent in the first year of operation, and subsequently on a reducing balance basis at 5 percent per annum.

As a result of the recent price instability in the world-wide energy markets, the project-team has felt it necessary to revise their estimates of the operating profits of the project, before depreciation and taxes in Gujistan dollars (G$) as follows:

G$ million

Year 1 30

Year 2 200

Year 3 250

Year 4 300

Year 5 330

Year 6 350

Year 7 - 10 380

The above estimates are now in real terms.


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