**Section I**

Read the case titled "Airport Express Metro Line: Infrastructure Project Financing and Implementation Through Public Private Partnership" and answer the following:

Assuming that the project is funded as a PPP, appraise the project from the viewpoint of all the equity holders under two scenarios:
1. When the BoT contract is supported by a Viability Gap Fund.
2. When the cost of civil works would be borne by the government and the airport operator.

In your analysis, you must at least report the NPV using the Quasi Market Valuation technique and the MIRR following QMV. Assume the cost of debt for the SPV to be 10%, the relevant risk-free rate is 8%, the market risk premium is 12%, and the unlevered beta for similar assets is 1.

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**Section II**

Given below are two numerical questions, each worth five marks. Both questions are compulsory.

**Question 1:**

Calicut airport seeks your help in filing the tariffs for the next regulatory period (five years). They have a document from AERA that mentions the formula for setting the price for aeronautical services as:

\[ \text{Present Value}[ \text{Price} \times \text{Volume} ] = \text{Present Value}[ \text{Yield per passenger} \times \text{Volumes} ] \]

Assume the volumes are expected to increase at 12 percent from the second year onwards. The price is expected to increase at 5% (rate of inflation). Find the price today if the yield per passenger is Rs. 50. The expected rate of return permissible is 14%. Also, determine the price for each of the years in the first regulatory period if the efficiency factor is 2%.

How does the RPI – X pricing method promote the spirit of competition (if at all)?

**Question 2:**

Project Alpha has two phases. You may invest in the first, in both, or in neither. The first phase requires an investment of Rs. 100 today. One year later, Alpha will deliver either Rs. 120 or Rs. 80, with equal probability. At that time (after the phase 1 payout has been received), you can invest an additional Rs. 100 for phase 2. One year later, phase 2 pays out either 20% more cash than phase 1 actually delivered, or (equally likely) 20% less. For investments in this business, your company normally applies a 10% hurdle rate.

1. How much would Project Alpha be worth if it offered only the phase 1 cash flows, without the phase 2 opportunity?
2. How much would the phase 2 opportunity be worth if you had to choose today, once and for all, whether or not to invest in it?
3. Assuming you can wait to decide about phase 2, what is the total value of Project Alpha? Should you invest the first Rs. 100?

Project Omega has exactly the same structure as Project Alpha, and the same systematic risk, but somewhat different cash flows. For Rs. 100 invested today, Omega delivers in phase 1 either Rs. 140 or Rs. 60, with equal probability. Phase 2 requires an additional investment of Rs. 100 and delivers either 40% more or 40% less than phase 1 did.

1. What is the total value of Project Omega? Should you invest the first Rs. 100?

Compare these two projects. Which of the two is riskier? Which is more valuable? Which has a higher fraction of its value accounted for by "growth options," i.e., the phase 2 opportunity? Assuming both were undertaken, would you finance Alpha and Omega differently? How and why?