7 COMPARISON BETWEEN THE TWO OPTIONS a prudent level of borrowings (average year-end debt balance at about HK$9.0 billion). This has helped us achieve a financial rate of return on equity of 10.7% in the year ending March 201125. To ascertain our capability in undertaking the Master Plan 2030, The Hongkong and Shanghai Banking Corporation Limited has been commissioned as our independent financial advisor to evaluate the financial feasibility of the development options under the Master Plan 2030 and advise on our prudent borrowing capacity based on our cashflow projections. The cashflow projections under both Options 1 and 2 are prepared on the following assumptions – (a) The final construction cost of the capital projects will be increased from the current estimate based on 2010 dollars to the MOD amounts, in line with the Tender Price Index (TPI) which is estimated to increase at the rate of 5% per annum from 2011 to 2014, 5.5% per annum from 2015 to 2020 and 3% per annum thereafter; (b) Our operating revenue will increase in line with traffic growth based on IATA Consulting’s base case traffic forecast for this period; (c) Airport charges will be adjusted in line with Consumer Price Index (CPI) movements (assuming 3% CPI increase per year up to 2030); (d) The majority of our profits will be distributed by way of dividends to our shareholder each year at a similar rate as in previous years; and Figure 7.5 8 7 6 5 4 3 2 1 0 Option 1 – Annual Capital Expenditure in HK$ billion HK$42.5 Billion Total Capital Expenditure 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Figure 7.6 3 2 1 0 Option 1 – Annual Net Cashflow after Dividend in HK$ billion 2030 HK$4.6 Billion Cumulative Net Cashflow after Dividend (1) (2) (3) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Positive Net Cashflow after Dividend Negative Net Cashflow after Dividend (e) We will continue to invest in our committed capital projects, such as Phase 1 of the Midfield Development, and the routine replacement of fixed assets. Cashflow Analysis – Option 1 Under Option 1, capital expenditure to be incurred would amount to HK$23.4 billion (in 2010 dollars) or HK$42.5 billion at MOD prices between 2013 and 2030. The annual cash outflow of the capital expenditure is shown in Figure 7.5. The results of our operations for each year based on the above-mentioned assumptions show a trend of rising profits. As depreciation is charged before arriving at our profits, the cashflow generated from our operations is the aggregate of our profits and the depreciation charge but less any increase in our working capital. At the same time, expenditure is incurred on the committed capital projects such as Phase 1 of the Midfield Development and routine replacement of fixed assets. 25 According to 2010/11 unaudited accounts. 46