1. As a result of the Octagon's refinancing there were changes to the aggregate amount of financial benefits which Octagon's investors expected to receive from the project and the timing of when those benefits were expected to be received.
2. The effect of these changes to the expected financial benefits to Octagon's investors is set out in Figure 1.
Figure 1: Changes in Octagon's investors' projected financial benefits
| At contract award | Just before the refinancing | Just after the refinancing | Post- refinancing benefits as multiple of pre-refinancing benefits |
Total projected cash flows to the investors over the life of the contract | £501m | £464m | £335m | 0.72 |
Net present value of the projected | £47m | £35m | £117m | 3.34 |
Internal rate of return to the investors (Note 2) | 19% | 16% | 60% | 3.75 |
Notes: | 1. The net present values of the benefits to Octagon's investors are calculated, in accordance with Treasury guidance, by discounting the projected cash flows at18.94%, the anticipated IRR to Octagon's investors reported by Octagon when the contract was let. |
| 2. The internal rate of return is the discount rate at which the present value of the investors' receipts from a project equals that of their payments, including their initial investment. The increase following the refinancing reflects the high value of receiving large returns early in the project. |
Source: | Derived from Octagon's financial records relating to the refinancing held by the Trust's financial advisers' Royal Bank of Canada. |
3. At current prices, the Trust expects to pay £1.3 billion to Octagon over the life of the contract. The total cash Octagon's investors expect to receive over the life of the contract was projected to fall following the refinancing from £464 million to £335 million. The investors have, however, significantly increased their benefits from the project in the early years, in exchange for reduced benefits in the later years of the contract. The increase in the internal rate of return to the investors to 60% reflected the value of receiving accelerated benefits from the project. The value of these accelerated benefits is similarly reflected in an increase from £35 million to £117 million in the net present value of the aggregate projected cash flows to the investors over the life of the contract.