(Continuous Uncertainty) - Assignment Example

However, some idealistic assumptions with some faith are also incorporated while formulating forecasted cash flows as the future is unpredictable and things can move onto the right desired track as well. In the current Dhahran Roads project, while formulating the assumptions, special care has been taken in respect of the assumptions on which the cash flows are forecasted. However, in the following paragraphs, the rationales for setting out these assumptions are outlined. Negotiations with the Transportation Ministry of the municipality of Dhahran have been finalized.

According to the terms and conditions set out with the Ministry, 80% of the billing amount would be paid by the ministry as soon as the bill received by the ministry. So the element of potential delay in the payment schedule is kept minimized. Still there is a risk involved if delays come across in the payments made by the government resulting in adverse movement in the forecasted Net Present Value. So far as likelihood of overrun cost is concerned, it has been assured that the best possible estimates of overheads and other expenses are maintained.

Since there seems to be “no unusual challenges” to be faced during the project life, therefore the possibility of cost overrun will likely to be at its minimum. Loss of retention looks to be one of the most critical assumption as there is exactly no surety whether the accumulated retention fund payments would be made at the end of 1997 and 1998 respectively into two equal installments by the ministry or not. The reason behind this uncertainty is that after the completion of the project, if the ministry is not satisfied with quality of project, this accumulated retention fund can be revoked by the ministry.

This is kind of a negative reinforcement measure that can be taken against SADE in order to maintain the minimum requirement for quality assurance of the project. In case if the loss of retention arises, it would certainly