Dharan Roads Case Study

Dhahrans Road Case Study Analysis

Fabrice Mbale, Krunal Solanki, Kuntal Master, Mateus Mendes, Marcos Dos Santos

Abstract

Executive Summary – SADE is a Civil Engineering company based in Bahrain. They have been selected as the prime contractor for a 168 million (SR) project in Dhahran to reconstruct and upgrade its roads network. Hassan Malik is the financial manager responsible to analyze the project.

Decision Problem – Malik, the Financial Manager, has to respond within a week to the project proposal weather SADE should proceed or not.

Alternatives

1. Move forward with the project
2. Reject the project

Assumptions

• The revenue is SR 168m and the costs were estimated in SR 146m with a 15% profit.(SR 22 million)

• 15 % of the contract’s total value advanced at signing of the contract

• 80% of each bill will be paid yearly after satisfactory inspection by the ministry

• 20 % deduction withheld for the recovery of the advance payment (15%) and 5% for the retention fund.

• Half of the retention (2.5%) would be reimbursed at the time of completion (end of 1997).

• The remaining half repaid at the end 1998 if roads don’t show any flaws in 1st year of use.

• SR 38 million for the cost of the equipment (paid at 75% upon placement of the order)

• SADE would be able to raise SR 4 million in loans with 12 % annual interest and would have to repay in full at the end of 1997. Total Interest expense of SR 480.000

Payment and Costs

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Alternatives

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Probabilities

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Actual Cash Flow

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Corrected Cash Flow

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Most Favorable Scenario (Likelihood – 21%)

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Most likely Scenario (Likelihood – 42%)

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Most Pessimistic Scenario (Likelihood – 14.4%)

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Conclusion and Recommendations

In Financial year 1993 and 1994 revenue from the project was in negative. The project has to be resubmitted for SADE board approval on the new NPV calculations.

Recommendations (if approved):