Because the rate of interest has no effect on the FIRR, the examination was limited to the study of cases involving a decline in demand and an increase and decrease in construction costs. The results of this are shown in Table 5-15.
The minimum conditions required for the project to exceed the standard FIRR value of 10% were found to be a 20% reduction in construction cost combined with a decline in demand of no more than 10%.
Table 5-15 Changes in FIRR in Alternative Trial Calculation Cases
2)Profit and Loss Balance
Table 5-16 shows the comparison between the profit and loss balance (years taken to enter the black) found for the 18 alternative cases and the standard case.
There are three cases where it is impossible to make a post-depreciation cumulative profit within the standard period of 20 years: they are where the interest rate is 7.5% and demand falls by 20%, where the interest rate is 7.5% and construction costs increase by 20%, and where each of the above conditions simultaneously occur. From this it can be seen that the effect of an increase in the rate of interest is great, and it is considered as essential for the securing of profitability that funds be borrowed at a low rate of interest. Having said that, even if the interest rate is 7.5%, it would be just about possible to reach the profitability standard if construction costs could be reduced by 20%. Therefore, reducing construction costs and, in particular, striving to cut the price of rolling stock (a major item within the construction cost) is considered as important.
