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Sir,
I understand why the initial fee is swapped and shown as (715) in year 0, since this is the cash outflow to pay for the rail franchise.
However I am confused as to why Buryecs gets a positive inflow of 715 in year 3. Wouldn’t that inflow be used to pay off the loan and not an inflow from the project?It is an inflow from the project.
If you read the second paragraph of the question, it says that they will pay 5,000 immediately, they will receive 600 in each of the next three years, and then at the end of three years they will sell it back to the government for 7,500. The 7,500 is the equivalent of the ‘scrap proceeds’ that happens in most projects,
Thank you for your prompt reply. So the $5000 was from a bank loan that was swapped at the current rate in year 0. At year 3, the government buys back the project for $7500, but $5000 of this $7500, is considered hedged as Buryecs will have to pay $5000 (at the original rate) back to the bank to repay the loan?
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