Assume that the company decides to continue with the current Love business. The following financial information is further available to you: Love business requires additional $1 billion over the next three years starting with the current year. These capital expenditures have been projected, including expected future cost increases, as follows: Year end 2022 2023 2024 Construction costs ($ million) 300 600 100 Generation of surplus from this expansion will commence in 2025 and the annual operating surplus in cash terms is expected to be $100 million per annum (at 1 January 2025 price and cost levels). This value has been well validated by preliminary studies and includes the cost of reprocessing, ongoing maintenance and systems replacement as well as the continuing operating costs of running the plant. The operating surplus is expected to rise in line with nominal GDP growth. The plant is expected to have an operating life of 30 years. Decommissioning costs at the end of the project have been estimated at $600 million at current (2022) costs. Decommissioning costs are expected to rise in line with nominal GDP growth. The company’s nominal cost of capital is 10% per annum. All estimates, unless otherwise stated, are at 1 January 2022 price and cost levels. The core macro economic assumptions are that country’s GDP will grow at an annual rate of 4% (nominal) and inflation will be maintained at the 2% target set by the Government. Produce a preliminary briefing note on the basis of the above information which includes: (i) An estimate of the net present value for this project as at the commencement of construction in 2022. (10 marks) (ii) A discussion of the principal uncertainties associated with this project (4 marks) (iii) A sensitivity of the project’s net present value (in percentage and in $), to changes in the construction cost, the annual operating surplus and the decommissioning cost. (4 marks) (Assume that the increase in construction costs would be proportional to the initial investment for each year.)

Assume that the company decides to continue with the current Love business. The following financial information is further available to you: Love business requires additional $1 billion over the next three years starting with the current year. These capital expenditures have been projected, including expected future cost increases, as follows: Year end 2022 2023 2024 Construction costs ($ million) 300 600 100

Generation of surplus from this expansion will commence in 2025 and the annual operating surplus in cash terms is expected to be $100 million per annum (at 1 January 2025 price and cost levels). This value has been well validated by preliminary studies and includes the cost of reprocessing, ongoing maintenance and systems replacement as well as the continuing operating costs of running the plant. The operating surplus is expected to rise in line with nominal GDP growth. The plant is expected to have an operating life of 30 years. Decommissioning costs at the end of the project have been estimated at$600 million at current (2022) costs. Decommissioning costs are expected to rise in line with nominal GDP growth. The company’s nominal cost of capital is 10% per annum. All estimates, unless otherwise stated, are at 1 January 2022 price and cost levels.

The core macro economic assumptions are that country’s GDP will grow at an annual rate of 4% (nominal) and inflation will be maintained at the 2% target set by the Government.

Produce a preliminary briefing note on the basis of the above information which includes: (i) An estimate of the net present value for this project as at the commencement of construction in 2022. (10 marks) (ii) A discussion of the principal uncertainties associated with this project (4 marks) (iii) A sensitivity of the project’s net present value (in percentage and in $), to changes in the construction cost, the annual operating surplus and the decommissioning cost. (4

marks) (Assume that the increase in construction costs would be proportional to the initial investment for each year.)