Imagine that you are a financial investor (able to offer a mixture of equity and debt) and you are asked to invest in a project to expand a section of the circular motorway around the town of Roermond. The project developer is looking to provide you with returns that are commensurate to the investment and risks you take. He offers you the following options: Option 1: You stand to make 7% on your investment (a mixture of debt and equity) which will be collected from toll charges to road users; Option 2: You can make 5% on your investment (a mixture of debt and equity) and then the contracting authority will pay a capacity payment based on an availability contract. What could be the reason for the difference in the two offered returns?
Imagine that you are a financial investor (able to offer a mixture of equity and debt) and you are asked to invest in a project to expand a section of the circular motorway around the town of Roermond. The project developer is looking to provide you with returns that are commensurate to the investment and risks you take. He offers you the following options: Option 1: You stand to make 7% on your investment (a mixture of debt and equity) which will be collected from toll charges to road users; Option 2: You can make 5% on your investment (a mixture of debt and equity) and then the contracting authority will pay a capacity payment based on an availability contract.
What could be the reason for the difference in the two offered returns?
Long-term investment decision or capital budgeting decisions are based on the method used for its evaluation.
Capital budgeting decisions are based on key elements such as rate of return, cash inflows and cash outflows, duration of the project or project life, salvage value of the asset, etc.
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