Presentation to Frozen Assets Limited Feasibility Study D.M.S Jehan Kanagasingham Lucian Keong Chris Nugent D.M.S.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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

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.

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.

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.

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.

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.