v. Assumptions

As many infrastructure projects have contractual agreements that go out fifteen or more years, assumptions must be made in order to estimate future cash flow. It is thus inevitable then that errors in forecasting will occur. It is also for that reason that all assumptions need to be identified and clearly stated. Depending on the project, assumptions can include:

■ Interest rates

■ Inflation rates

■ Rate of tariff increase (if applicable)

■ Traffic projections (if applicable)

■ Construction time

■ Depreciation schedule

■ Tax structure

■ Physical life of the assets

■ Technological life of assets

Box 3 - 3 on the following page is an extract from the assumption spreadsheet constructed for the sample toll-way project in Appendix 1 - Financial Models. Though simplistic, it highlights assumptions made in regards to operating revenues and expenses, taxes, construction costs and capital structure. The project assumes daily vehicle traffic flow at 14,330 for years one and two and annual cash flow based on varying toll rates for each type of vehicle. Also assumed is a 70 percent debt to 30 percent equity capital structure with a tax holiday until year six.

	Box 3 - 3 Assumption Worksheet
Operating Cash flow
		Year 1 - 2
Revenues

Type of Vehicle Traffic Increase	Daily Traffic Projection	Toll per Vehicle	Annual cash flow

Motorcycle	1,500	2.00	1,095,000
Passenger	8,500	3.00	9,307,500
Commercial 1	1,680	4.00	2,452,800
Commercial 2	850	4.00	1,241,000
Commercial 3	1,800	5.00	3,285,000
Total	14,330		17,381,300

Operating Expenditures

Fixed Operating Costs			3,300,000
Variable - per vehicle/day	0.75		3,922,838
Total Expenditures			7,222,838

Taxes	Year 1 - 5	Year 6 - 10

Rate	0%	25%

Financing
	%	Amount	Cost of Capital
Debt	70%	£49,350,000	8.5%
Equity	30%	£21,150,000	15.0%

Total	100%	70,500,000