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Dhahran Roads

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Dhahran Roads
Introduction: Hassan Malik, Financial Manager of SADE, a Bahraini civil engineering company has been approached by Saudi Arabia to upgrade an important stretch of highway. Cash flows for this project have determined that the estimated net present value at 15 per cent return is a positive SAR8.8 million; which undoubtedly makes a net contribution to value. However, when examining the project further, there may be several constraints and risks that may negatively affect the project, thus negatively affect the project’s net present value. These constraints and risks are detailed in the following.
Political Context of Saudi Arabia in 1992/1993: Saudi Arabia is a nation of nearly 30 million people. It borders Jordan and Iraq to the north, Kuwait to the northeast, Qatar, Bahrain and the United Arab Emirates to the east, Oman to the southeast, and Yemen in the south. At the time, the region experienced the Iran-Iraq war between 1980 and 1988 and shortly after moving into the Gulf War which lasted until 1992. During the Gulf War, Saudia Arabia was surrounded and projected by United States troops, which were prime targets for attacks by neighbouring Iraq. When the war ended in 1992, Saudi Arabia was in need of considerable infrastructure upgrades and repairs, hence the likely need for the Dhahran Roads project. In entering negotiations with Saudi Arabia, SADE must also account for the political unrest and strife in the post-war region. These risks, along with the possible threat of retaliation from political opponents, could have severed the project, posing serious risks to being unable to recoup upfront investments and yield positive cash flows in the following years.
Loans: The fact that SADE required a loan was likely for the upfront costs of equipment in year one, which the 15 per cent advancement could not maintain. Although a very small amount

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