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Product Overview

Cummins, Epley, and Mayo, a U.S.-based construction firm, has been selected as the prime contractor for a road-reconstruction project in Saudi Arabia. Based on company cost estimates, the project provides a 15% return on costs, well below the required 18%. Because of a substantial advance payment and the specific timing of the payments, the project's IRR is 40%. This case can be used as an introduction to or a reinforcement of discounted-cash-flow techniques. It provides a dramatic portrayal of the time value of money, an opportunity for sensitivity analysis, and a possibility for using decision diagrams for structuring realistic contingencies.

Learning Objectives

It can be taught with the following objectives: • to dramatically portray the time value of money; while the project offers a 15% profit margin, it has a 41% internal rate of return (IRR) because of favorable differences in the timing of receipts and disbursements during the project • to introduce or reinforce the mechanics of net present value (NPV) and IRR • to examine the effects of uncertainty on project performance; one-at-a-time sensitivity analyses suggest that the uncertainties are not critical for the go/no-go decision; simultaneous changes in several uncertainties (scenarios) indicate that some downside exposure exists • to apply decision diagrams as a tool for structuring a comprehensive sensitivity analysis • to encourage the development of a counter-proposal to the contract offered by the Saudi government rather than the simple acceptance or rejection of the Saudi proposal