Presentation to Frozen Assets Limited Feasibility Study

1. Presentation toFrozen Assets LimitedFeasibility Study D.M.S Jehan Kanagasingham Lucian Keong Chris Nugent D.M.S.

2. I. Introduction • Frozen Assets Limited is a large diversified company operating on a national basis in the manufacturing sector • Corporate policy has been to encourage exporting and spreading interests across a wide range of markets and industries • A number of recent projects have involved the development of facilities and operations from scratch requiring significant capital outflows • Currently, Frozen Assets is considering the construction and development of a ski field and associated ski resort from scratch • Frozen Assets has approached us to provide a report on the feasibility of the potential investment • The following data has been provided by Frozen Assets and external market research organisations D.M.S.

3. I. Introduction - Data • Potential demand forecasts from market research organisation • Assumes that a reasonable level of promotion is undertaken ($30,000 per season for the first three years and $6,000 thereafter. Ski conditions are pessimistic, good and fair with probability 20%, 60% and 20%. • Assumes an average inclusive price of $114 per person day D.M.S.

4. I. Introduction - Data • Historic ski conditions are as follows: • Based on the experience of existing resorts, reductions on the demand levels from a good season are likely to be 10%, 20%, and 35% for average, poor and very poor ski conditions D.M.S.

5. I. Introduction - Data • We have also been given data on the forecast overhead costs as well as expected construction costs • The approach used to determine the feasibility of the project is a discount cash flow approach. • Specifically, using a net present value (NPV) valuation model D.M.S.

6. II. Executive Summary • The analysis has concluded that the project adds value to Frozen Assets • The resulting net present value (immediate value added to the business) is $5,486m under the base set of assumptions • Key concern of the board was the potential for future demand to be ‘pessimistic’ in all 12 forecast years. • Analysis demonstrates that even in this situation the project adds value • Break even analysis and sensitivity testing indicates that the net present value is most sensitive to changes in potential demand and price level • These factors need to be carefully revised whenever there is a change in the business or general economic conditions • As a result of these findings, we recommend that Frozen Assets proceed with the investment D.M.S.

7. III. Approach - Discount Cash Flow Model • Empirical evidence suggests that a discount cash flow approach is the most common approach used by management to evaluate project feasibility • Net present value (NPV) method looks at present value of future net cash flows and any initial capital outflows • Basic model • Two key components of model: cash flows and discount rate • Assumption in the above model that the project has a fixed life • Benefit of such a model is tractability D.M.S.

8. III. Approach - Cash Flows • Issue that arises is whether or not to use real or nominal cash flows • Real cash flows adjust for the effect of inflation, while nominal cash flows make no adjustment • Periods of high inflation suggest the use of real cash flows • General assumption that cash flows occur throughout the period, approximated using a mid year convention D.M.S.

9. III. Approach - Discount Rate • Discount rate also known as required rate of return • Represents the return demanded by investors to compensate them for providing capital • Framework is based on the Capital Asset Pricing Model (CAPM) which breaks up the required rate of return into two components - risk free component - risky component • Specifically model states that the required rate of return is • Difficulty lies in estimating the risky component for a project • CAPM model assumes we can find an estimate for  D.M.S.

10. IV. Assumptions - Forecast Cash Flows • Revenue cash flows are built out from the following assumptions D.M.S.

11. IV. Assumptions - Forecast Cash Flows • Based on the data given by management, and a 65% probability of high costs and a 35% probability of a low cost • It is assumed that variable costs in the base case scenario are $6 and are not expected to exceed $12 • In the base case scenario, all other data estimated by Frozen Assets has been assumed to be fair • Other cash flows will include overheads, marketing expenses as assumed and a permit fee of $300,000 to be paid the government if the project proceeds in equal installments over 5 years D.M.S.

12. IV. Assumptions - Forecast Cash Flows • Building out these assumptions gives us the basis to build up a series of net cash flows over the 12 forecast years • This cash flow pattern is expected as it involves initial capital expenditures followed by net cash inflows which are increasing during a growth phase and then stabilising D.M.S.

13. IV. Assumptions - Cash Flows in Perpetuity • Assumed that operations continue in perpetuity. That is beyond the forecast 12 year projection • Cash flows in the 12 year forecast stabilise in the final two years of the forecast period • This forms the assumptions behind the cash flows occurring in perpetuity • Assumed that significant maintenance, construction and repair work takes place every 12 years • Net cash flows in perpetuity show the following pattern D.M.S.

14. V. Analysis - NPV Valuation Model D.M.S.

15. V. Analysis - Sensitivity • In addition to the base case, sensitivity analysis has been used to look at how changes in key value drivers affect the net present value D.M.S.

16. V. Analysis - Risk & Potential Upside • Key concern of management was the potential outcome if forecast ski conditions were pessimistic in all 12 forecast years • Even in this scenario, project adds value. On top of this, clear upside potential to the project D.M.S.

17. V. Analysis - Risk & Potential Upside • Net present value is also sensitive to the pricing assumptions used in the model • Once again, in our hypothetical pessimistic pricing scenario, the project still adds value. Also demonstrates clear potential upside from good management and marketing D.M.S.

18. V. Analysis - Break Even Analysis • Break even analysis gives an indication of how poor factors driving revenue must become, or how much expenses must increase until the project become infeasible in net present value terms • Another way to consider the sensitivity to key value drivers D.M.S.

19. VI. Other Considerations • Following up from this report, we recommend Frozen Assets proceeds with the development and construction of the ski field and associated resort • Some of the following issued should be considered - To rectify concerns regarding lack of expertise, advisable to seek management with experience in the construction and running of ski fields/resorts - Management with specific experience can assist with minimising delays during the construction phase and controlling costs - Focus managements efforts on increasing demand. Possible to achieve this through increased advertising without affecting feasibility - Avoid cutting costs to increase demand, estimated prices would currently be competitive - To a lesser extent, focus on minimising overheads, variable costs and significant maintenance and repair costs D.M.S.