Dhahran Roads (a)
2 Pages Posted: 21 Oct 2008 Last revised: 25 May 2018
SADE, a Bahrain-based civil engineering company, 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.
Rev. May 22, 2018
Dhahran Roads (A)
Hassan Malik, the financial manager of SADE, a Bahrain-based civil engineering company, reread the recently received fax. He was delighted that the nearly endless conversations with the Transportation Ministry of the municipality of Dhahran in eastern Saudi Arabia were finally coming to a close.
SADE had been selected as the prime contractor for a 168 million Saudi riyal (SAR) project that involved the reconstruction and upgrading of the highway network linking the several terminals of the Dhahran airport and connecting the entire complex with the city. The Dhahran Roads project was indicative of projects on which SADE had established its international reputation for being a leading construction contractor. The total cost of the project was estimated to be SAR146 million, so the SAR168 million value provided only a 15% return, which was, unfortunately, below the 18% hurdle rate required by SADE for projects of this nature. On the other hand, the slightly less-than-desired return seemed a small cost to pay to maintain a steady flow of new projects during these slow economic times.
The fax requested that Malik respond to the project proposal within a week. The wording of the contract would then be finalized in the subsequent weeks and the contract signed by mid-January 1993.
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Keywords: capital budgeting, internal rate of return, international business, diverse protagonist, middle eastern/african, net present value, international case, diversity case, sensitivity analysis
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