Capital investment decisions encompass two aspects of long-range profitability: first, estimating the future net increases in cash inflows or net savings in cash outlays which will result from the investment; and second, calculating the total cash outlays required to effect the investment.
If the State Coal Company decides to raise the price in two years it will cause a definite risk for Global Power as the profit may fall significantly.
The risk is that the price are escalated to a defined formula, which means that even if economic situation in the country is changed significantly there is a risk that the defined formula will not satisfy the need of Global Power in three years. But, it will not have possibility to buy at another supplier. Another risks are unstable economic and political situation in the Eastern European countries. Low level of GDP and high inflation rate are the main risks for Global Power. It should be noted that for auditor it would be difficult to estimate long-term risk of investment because economic instability has a great impact on the industry in general. It is stipulated that opportunities arise under a government privatization program expected that in three years the electricity market is to be in place, but the auditor should assess the possible risk of this market change occurred in three years. The auditor of the company should pay a special attention to the period of expected surplus, and the rate of return during this period, and after it.
The objectives of the auditor before financial close: to evaluate the situation and make calculations which will help the investor to make a decision about ...