G.F. 323
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Alternative Assumptions
22.
Sensitivity analysis has shown the influence upon the
outcome of the project and, in particular, on the payback year and
maximum loan requirements, of changes, both optimistic and pessimistic,
in some of the basic assumptions. The effects of some of the more
pessismistic assumptions are given below.
23.
Cash flows are highly sensitive to capital cost and
gross revenue. An increase of 5% in real terms in the former, or a
similar decrease in the latter, delays the payback by just over one
year; in the former, but not the latter, case the maximum total
outstanding loan figure increases by some HK$400m. Altering the
rate of escalation of either costs or revenues, without adjusting
the general rate of inflation, has an even more severe effect.
Operating costs tend to be low in relation to revenue, and altered
assumptions in this case have commensurately less effect.
24.
A one year delay in final commissioning has a similar
effect to a 5% increase in real capital costs. The effects of
inflation are severe only if, as is unlikely over an extended period,
they are unmatched by a similar movement in interest rates. For
instance, if inflation dropped to 2% p.a. throughout the rest of the
century and interest rates remained unchanged, thus rising in real
terms, the payback would be delayed until 1995. Higher interest rates
or taxes, in real terms, have a relatively unimportant effect on the
payback year and volume of finance required.
Conclusions
Costs and Revenue
25.
Since January the estimate of the total contract cost has
decreased, and the revenue estimate has been confirmed. The overall
cash flow result has, however, not improved, owing to changes in
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