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414JOHNSTAFF *

Attachment K

Financial AppraisalThe Ultimo Presence Project

Cultural Infrastructure Program

Management OfficeUltimo Presence Project

Financial Appraisal

PAXON GROUP

Perth • \ telbourne • Sydney I November 2017—Version LO

Corporate Finance

Management ConsultingProject Finance and Infrastructure

PAXON CROUP

Table of Contents1

2

Introduction1.1 Financial Appraisal1.2 Strategic Context1.3 Project Objectives1.4 Option Definition

Methodology

333345

2.1 Financial Approach 52.2 Schematic Outline 52.3 Financial Appraisal Parameters 62.4 Discount Rate 62.5 Capital Costs 82.6 Area 92.7 Visitation Forecasts 102.8 Workforce Inputs 102.9 Revenue 112.10 Expenses 122.11 Exhibition Cash Flows 132.12 State Cash Flows 152.13 Residual Value 15

3 Results 173.1 Capital 173.2 MAAS Cash Flows 173.3 State Cash Flows 183.4 Residual Value 193.5 Summary 19

4 Sensitivity 204.1 Visitation Forecasts 204.2 Sponsorship 204.3 Marketing and Development 214.4 General and Administration 21

CIPMO I Ultimo Presence Project Financial Appraisal Page 2

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Introduction

1.1 Financial Appraisal

Paxon Group ("Paxon") has been engaged to prepare a financial appraisal for the exploration of options for the retention of cultural space on the existing Powerhouse Museum site in Ultimo.The aim of the financial appraisal is to evaluate and summarise the various costs and revenues associated with the potential options under consideration within the Ultimo Presence Investment Case. The financial appraisal uses these cash flows to determine the net present value ("NPV") of the project and other key metrics associated with its implementation. The aim of this process is to assist the Government in making sound and measured business decisions to improve outcomes for the State and its population.

1.2 Strategic ContextThe Museum of Applied Arts and Science ("MAAS") is Australia's contemporary museum for excellence and innovation in applied arts and sciences. MAAS currently operates the following three venues:· The Powerhouse Museum in Ultimo;· The Sydney Observatory in Millers Point; and· The Museums Discovery Centre in Castle Hill.The NSW Government is committed to establishing the flagship campus of MAAS in Western Sydney. The Cultural Infrastructure Program Management Office ("CIPMO") is managing the development of the extended business case for the New Museum and is working closely with MAAS.The establishment of the New Museum in Western Sydney creates an opportunity to revitalise the current Powerhouse Museum site, through a mixed-use development. The intention is to provide a renewed MAAS presence in Ultimo (the "MAAS Presence"), complementing and supporting the new facilities created by the flagship New Museum in Western Sydney. The Ultimo Presence Investment Case also considers the inclusion of a new Lyric theatre, responding to the recommendation within the Cultural Infrastructure Strategy to identify potential sites for a Lyric theatre to be developed by the private sector.This Financial Appraisal analyses the costs and revenues associated with the different solutions for the arts and cultural space (the "Facility").

1.3 Project Objectives

The Project Definition Plan establishes the following core project objectives:Objective 01 Ensure the potential for a renewed MAAS in Ultimo, complementary to

key adjacent urban renewal projects.Objective 02 Enable and encourage education, industry and research partnerships with

the education sector and creative and digital industries through the MAAS Presence.


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Objective 03 The MAAS Presence that has the capability and scale to operate effectively as a cultural exhibition and programming venue to internationally recognised standards

Objective 04 Investigate the commercial and development opportunities inherent in the site to off-set project costs.

Objective 05 Develop a sustainable operating model that enables ongoing revenue raising and commercial opportunities

Objective 06 Achieve within the proceeds generated from the divestment of parts of the Ultimo site; without compromising the outcome for the New Museum in Western Sydney

1.4 Option DefinitionThere are three options under consideration with the Final Business Case. The three options consider different museum developments characterised by the following:

1. Option 1: Re-purposing and re-fitting the buildings to function as both a museum and other commercial spaces;

2. Option 2: Re-purposing and re-fitting the heritage building to function entirely as a museum (with temporary and permanent galleries, administrative spaces etc.).

3. Option 3: Re-purposing and re-fitting the buildings to function as both a museum and a Lyric theatre.


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2 Methodology

The Financial Appraisal has been conducted in accordance with NSW Treasury's TPP07-4 Commercial Policy Framework: Guidelines for Financial Appraisal ("Guidelines") (Treasury 2007).

2.1 Financial ApproachConsistent with the Guidelines, a Discounted Value of Projected Future Cash Flow ("DCF") model was developed in accordance with modern financial theory. The modelling captures the various cost and revenue impacts of the assessed options and presents them projected over an appropriate time horizon balancing accuracy in projections with estimated implementation requirements.The DCF approach is suitable to apply given the growth and changes expected under the options and the uncertainty of outcomes into the future. The methodology provides useful flexibility to model various scenarios and changes in assumptions, important in making sound business decisions and verifying results. Ultimately, it is a well-established financial analysis process that has been applied successfully to comparable decisions and circumstances in the past.

2.2 Schematic Outline

The modelling structure is illustrated by the following major stages:

1. Accumulation and estimation of inputs and assumptions;2. Calculation of projected cash flows; and3. Utilisation of the valuation approach and summation of the results in an

appropriate framework.

Figure 1 illustrates this process.

Figure 1: Approach to the Financial AppraisalCapital cost

plans

Historical

operating

performance

Workforce

transition plan

Vis i ta t ion

fo recas t s

Economic

forecasts

Consultation &

research

Capital

expenditure

Operating

expenditure

Operatina

revenue

Projected cash flows

NPV & Project

Metrics


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2.3 Financial Appraisal ParametersA range of timing, cost and escalation assumptions were adopted to undertake the financial appraisal. These assumptions are summarised in the table below.Table 1: Financial A . • raisal Assum • tionsItem Assumption Source

Base date for NPV 30 June 2018 Base assumption

Cash flow timings Annual Base assumption

Timing of cash flows End of the period (30 June) Base assumption

Inflation • FY 2019: 2.25% NSW Treasury Sydney CPI· FY 2020: 2.50% (exd. Tobacco excise)· FY 2021+: 2.50% projections

Public sector salary increases • FY 2019: 2.50% NSW Treasury· FY 2020: 2.50%· FY 2021+: 2.50%

Period of analysis Design & Construction: Rider Levett Bucknall· 1 July 2018 to 30 June

2024Operations· 1 July 2023 to 30 June

2043 (20 years)

Project Delivery Timeline

The appropriate determinant of the operating period for the Facility should be the asset's economic life. However, for long-lived assets, the Guidelines suggest restricting the operating term to 20 years and then estimating the asset's residual value to represent the remaining service potential.

This methodology recognises that after a period of 20 years, the analysis will be relatively insensitive to the choice of a longer project period due to the discounting of future cash flows. It also recognises the difficulty of forecasting cash flows over such long periods.

2.4 Discount RateTo assess and compare estimated project cash flows and options, all cash flow streams were discounted by the post-tax weighted average cost of capital ("WACC"). This represents the expected financial market rate of return that investors would require in order to supply debt and equity capital for investment in a similar asset.

The post-tax WACC was calculated according to the formula below:D E 1

WACC = (1- 0 [r d— + r_________ V eV1 - t+ yt

W he r e :

pre-tax cost of debt

re = pre-tax required rate of return on equity

D= target debt

E_ target equity

CIPMO I Ultimo Presence Project Financial Appraisal I'age 6

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V = (D+E), the value of the organisation's target debt and equityt = the corporate tax rate of 30.00%.Y = dividend imputation effect.The Guidelines stipulate that a value of 0.5 should be used for the dividend imputation effect in line with the value used by regulators.Apart from the tax and imputation terms, there are three other components in the after-tax WACC formula as stated in the equation above:· Cost of debt;· Cost of equity; and· Capital structure or leverage.All funding for the project will be received as Government grants. It is, in effect, 100% equity funded. Therefore, the only component that needs to be calculated is the cost of equity.

The cost of equity was calculated using the Capital Asset Pricing Model ("CAPM"). The expected rate of return on equity derived from the CAPM is defined as follows: re = rf + fle(rm - rf)

Where: re =

rf =

r m = r m

- r f

pre-tax required rate of return on equity

risk-free rate of return

the equity beta, a measure of sensitivity of an investment's return to the hypothetical market portfolio return

expected nominal return on the market portfolio (approximated by the yield on the market portfolio of common equity shares)the market risk premium, a measure of the expected return above the risk free rate.

2.4.1 The Risk Free RateThe Guidelines stipulate that the most appropriate measure of the risk free rate is the 10-year Commonwealth Government Bond yield. In order to smooth short-term volatility, a 20-day average of the historical daily yield was used. This rate was 2.75% p.a. on 4 October 2017.

2.4.2 The Market Risk PremiumThe equity market risk premium is the difference between the gross return on the market portfolio and the return on the risk free rate. As recommended by the Guidelines, a market risk premium of 6.00% was utilised.

2.4.3 Equity BetaAn asset beta is a measure of an asset's return sensitivity to variations in the market portfolio return. As the beta for the project is unquantifiable, it is necessary to estimate a proxy.To arrive at a beta factor for MAAS, the betas of listed companies with a similar risk profile were unlevered, and averaged to provide the appropriate asset beta estimate. As a 100% equity funded entity, this also represents the appropriate equity beta.


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The following companies were selected as being the most comparable, in terms of systematic risk profile, to the project:

· Qantas Airways Limited;· Virgin Australia Holdings Ltd;· Crown Resorts Ltd;· Flight Centre Travel Group Ltd;· Village Roadshow Ltd;· Ardent Leisure Group; and· Event Hospitality and Entertainment Ltd.

Broadly speaking, these companies fall into either the tourism industry, or the leisure industry. These industries were selected as they are exposed to many of the same external drivers as those faced by the arts and culture industry. These drivers include:

· Real household discretionary income;· Domestic tourist visitor nights;· International tourist visitor nights; and· Average weekly hours worked.

Using beta and capital structure data from DatAnalysis (Morningstar), the implied asset betas for each of these companies was calculated, as shown in Table 2.

Table 2: Comparables Implied Asset Beta

CompanyBeta Equity from Implied Asset Beta

Market

Qantas Airways Limited 0.95 0.70

Virgin Australia Holdings Ltd 1.21 0.63

Crown Resorts Ltd 1.18 1.15

Flight Centre Travel Group Ltd 1.08 1.74

Village Roadshow Ltd 1.46 0.74

Ardent Leisure Group 1.13 0.87

Event Hospitality and Entertainment Ltd 0.80 0.71

Average 1.12 0.93

Using the average implied asset beta as the appropriate equity beta, the WACC was calculated as 6.88% p.a. after taking into account the effects of taxation and dividend imputation as stipulated by the Guidelines.

2.5 Capital CostsRider Levett Bucknall ("RLB") developed preliminary design and construction cost estimates for the New Museum, as summarised below.

Table 3: Construction and Develo • ment Costs

Capital Option Option 1 Option 2 Option 3

Demolition and basement works

Mixed use hub / refreshed museum / theatre

Museum fit outCIPMO I Ultimo Presence Project Financial Appraisal Page 8

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Capital Option Option 1 Option 2 Option 3

External works

TOTAL $431.40m $524.04m $387.45m

RLB also prepared a life cycle costing report for each capital option, which expresses the life cycle cost breakdown for each capital option as 20 year totals, 'average annual' and as a percentage of capital cost.

Table 4: Life C de Cost In . uts

Estimate Option 1 Option 2 Option 3

Capital Cost $431.40m $524.04m $387.45m

Repurpose Exhibition Fitout $85.90m $110.17m $49.44m

Life Cyde Replacement Other than Above $63.63m $68.87m $88.23m

Total 20-year Life Cyde Replacement $149.53m $179.04m $137.70m

Mean cost p.a. $7.74m $9.27m $7.04m

°A Capital cost p.a. 1.79% 1.77% 1.82%

RLB provided forecast annual expenditure over the project term and these estimates were utilised in modelling these outlays. RLB developed these estimates in accordance with International Standard 15686-5 Life cycle costing.

Adjustments were made to RLB's annual expenditure estimates to remove the costs associated with repurpose exhibition fit out. MAAS also estimated these costs with consideration given to existing gallery refresh costs and the number of temporary and permanent gallery spaces in the Facility. Section 2.11 details these costs and their timing.

2.6 Area

Johnstaff provided the schedule of area for the MAAS presence in each option, as detailed in Table 5 below.

Table 5: MAAS Presence Area by Option

Option 1 Option 2 Option 3

Event & Support Spaces 3,309 m2 6,089 m2

Galleries 6,581 m2 6,581 m2 3,261 m2

Touring 1,250 m2 1,250 m2 1,165 m2

Back of House 1,062 m2 445 m2 765 m2

Total 12,202 m2 14,365 m2 5,191 m2

In addition, there are varying levels of commercial space in each option from which the State will generate lease revenue. Table 6 presents the amount of commercial space in each option.

CIPMO I Ultimo Presence Project Financial Appraisal Page Q

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Table 6: Commercial Area by Option


Commercial space 3,080 m2 3,166 m2

2.7 Visitation Forecasts

SGS Economics & Planning Pty Ltd ("SGS") prepared visitation forecasts for the following categories of visitors to the MAAS Presence in the Facility:

· NSW visitors;· Interstate visitors; and· International visitors.

SGS provided these forecasts for each option, with the 'High' scenario utilised on advice from CIPMO.

2.8 Workforce Inputs

MAAS, together with Altura Partners, provided the proposed workforce model for each MAAS Presence option. Table 7 presents this below.

Table 7: MAAS Presence Workforce Profile


Galleries

Content Producers 3

Strategic Collections 3

Workshop 2

Digital Content/Product Manager 1

Design 2

Centre Producers 2

Exhibition/Production Coordinator 1

Facilities and Corporate

Facilities 3

Security Supervisor 2

HR & Admin 3

Resource Hub / Archives

Information Officers 3

Development and Communications

Comms 1

Development 1

Events 1

Programs and Activation

Tertiary Producer 1


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Maker Space Producer 1Early Childhood Producer

1Centre for STEAM Producer

1Visitor Services Officer 14 14 11Visitor Services Manager 1 1 1Booking Officer 1

For options 1 and 3 it is assumed that other overhead positions will be covered from the existing MMAS workforce based at Western Sydney and the Museums Discovery Centre.Altura Partners provided the salary costs associated with the visitor services officers and the visitor services manager. The salary costs for the remaining positions were taken from similar positions within the existing workforce.Altura Partners project that on costs and staff related expenses together are 30.77% of salaries and wage costs.

2.9 RevenueA five-step process was utilised to project revenues for the MAAS Presence in the Facility:1. Calculate average revenue results for the existing

Powerhouse in Ultimo for the past two financial years;2. Remove portion of revenue attributable to exhibitions;3. Remove portion of revenue attributable to the Museums

Discovery Centre and the Sydney Observatory;4. Apply revenue adjustments related to the New Museum; and5. Apply price and volume drivers.Table 8 presents the first three steps of this process.Table 8: Revenue Base Figures

FY16/17

Average

Less:

Exhibitions

MAAS

Base

Figure

Facility%

Facility

Base

Figure

Adrnissions Revenue

$5.16m

46.15%

$2.78m

70.96%

$1.97m

Sponsorships$1.02m30.62%$0.71m100.00%$0.71mMembers Fees

$0.31m

$0.31m100.00%$0.31mShops

$1.06m41.08%$0.62m88.59%$0.55mF&B / Catering

$0.26m

$0.26m100.00%$0.26mRental and

Venue Hire

$0.63m

$0.63m

98.61%

$0.62m

Other Revenue$0.76m2.40%$0.74m97.15%$0.72m


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Revenue AdjustmentsUnder all options, CIPMO advised that the MAAS Presence would open with 25% additional sponsorship revenues (weighted according to visitation and relative to the existing Powerhouse in Ultimo).

DriversThe adjusted base figures for each stream are linked to a price driver and a volume driver. MAAS advised that they adjust the price of admissions every five years by CPI. The remaining revenues are assumed to follow CPI. The real value of all revenues is driven by visitation.

Table 9 summarises these revenue drivers.

Table 9: Revenue Drivers

Price Driver Volume Driver

Admissions Revenue CPI every 5 years Visitation

Sponsorships CPI Visitation

Members Fees CPI Visitation

Shops CPI Visitation

F&B / Catering CPI Visitation

Rental and Venue Hire CPI Visitation

Other Revenue CPI Visitation

2.10 ExpensesThe five-step process utilised to project revenues was also adopted to project operating expenses. However, due to the operation of the New Museum in Western Sydney, a number of expenses are not expected to be duplicated at the Ultimo site (e.g., audit fees). Adjustments were made to historical results to remove these expenses.

Table 10 presents the results of this process.

Table 10: Expense Base Figures

Casual Wages ExpensesAdjusted

FY16/17

Average

Less:

Exhibitions

MAAS

Base

Figure

Excluded

Facility%

New

Museum

Base

Figure

Programming

$2.50m

81.32%

$0.47m

96.14%

$0.45m

Marketing and Development

$1.64m

38.74%

$1.00m

99.28%

$1.00m

Occupancy / Facilities

$5.53m

17.09%

$4.58m

93.04%

$4.26m

Other

Overhead

$4.09m

36.41%

$2.60m

96.52%

$2.51m


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Adjusted Less: MAASFY16117 Exhibition Base Facility%Average s Figure

New

Museum

Base

FigureGeneral & Admin $0.99m 12.75% $0.86m 98.58% $0.85m

CIPMO advised that casual wages were captured by the workforce model provided by Altura Partners.

AdjustmentsOn advice from CIPMO, adjustments were made to the following expense streams:

· Marketing and development; and· General and administration.

Both expense streams were reduced by 65%, recognising this will not be a stand-alone museum, but rather one of multiple 'front-doors' to a multi-site museum. The adjustments reflect the expected impact of synergies with the New Museum in Western Sydney, the Museums Discovery Centre and the Sydney Observatory.

Drivers

The adjusted base figures for each expense stream are linked to a price driver and, in some instances, a volume driver. All relevant expense streams are linked to CPI.

Programmatic expenses are expected to vary according to the amount of gallery space in the MAAS Presence and are linked to the gallery area relative to the existing Powerhouse in Ultimo. Occupancy and facility costs relate to the size of the facility more broadly, and are driven by the total area relative to the existing Powerhouse in Ultimo.Table 11 presents the expense drivers.

Table 11: • ense DriversPrice Driver Volume Driver

Casual Wages Expenses Public sector salary increases n/a

Programming CPI Gallery area

Marketing and Development CPI n/a

Occupancy / Facilities CPI Total facility area

Other Overhead CPI n/a

General & Admin CPI n/a


Reven

Admission

Commercial

Sponsorshi

Oth

Expens

Casual

Salaries & Wages On

Salaries

Hire &

Repairs &

Utilities &

Advertising &

Consumabl

Entertainment &

Fees -

Fees -

Financial

Printing &

Ret

Travel &

Large Touring Medium Touring

PAXOfV G11.0111)

2.11 Exhibi t ion Cash Flows

2.11.1 Touring ExhibitionsMAAS advised the expected programming for the touring space within the MAAS Presence was one large touring exhibition and one medium touring exhibition each year. Within this context, a large touring exhibition is an international "blockbuster exhibition" that draws large audiences and provides a healthy financial return. The Art of the Brick, which MAAS exhibited at the Powerhouse Museum in the last financial year, falls within this category. Medium touring exhibitions capture touring exhibitions with less universal appeal.

Table 12 below sets out the anticipated cash flows associated with these exhibitions. These estimates are informed by the results of the Art of the Brick and Game Masters exhibitions, and the budget for the Ancient Lives exhibition. These exhibitions were selected by MAAS as representative of these exhibition categories with financial results that are expected to be replicated by future large and medium touring exhibitions.

Table 12: Expected Touring Exhibition Cash Flows

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Other

2.11.2 Standard Offer ExhibitionsMAAS will also produce a range of exhibitions for which there will not be an additional admission charge, but rather will form part of their standard offer. In the Facility, the MAAS Presence will display these standard offer exhibitions in the temporary and long-term galleries. Table 13 below sets out the assumptions attached to these spaces.Table 13: On: oin: Standard Offer Exhibition E • enses

Description Temporary PermanentGalleries Galleries

Turnover frequency Every 4 years Every 6 years

Cost $3,300,000 $1,100,000

In addition to these costs, there will also be an increased maintenance cost due to the expected increase in the complexity of the technological component. This was modelled as an $81,860 expense increase based on historical collections maintenance expenses and consultation with MAAS.

2.12 State Cash FlowsThe following cash flows do not affect MAAS, but are included in the financial appraisal as impacts to the State.

2.12.1 Commercial RentTable 14 presents the assumption used to calculate the rents generated by the commercial space. These assumptions are based on a CRBE report advising Property NSW on the highest and best use of the Ultimo site.

Table 14: Commercial RentAssumption Value

Face rent $750 per m2 per annum

Incentive 15%

2.12.2 Building Maintenance

Building maintenance expenses will sit outside of MAAS operating budgets and will be met by the State under facility wide arrangements. The financial appraisal utilises RLB's estimates of annual building maintenance expenses for each facility option, as shown in Table 15 below.Table 15: Building Maintenance

Option Building Maintenance

Option 1 $261,678 per annum



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2.12.3 Capital Contribution and Theatre LeaseAs advised by CIPMO, Create NSW will lease the Lyric theatre to a private provider

for an annual lease payment ol111111 and an upfront capital contribution am2 . 1 3 R e s i d ua l V a l u e

As the project life is shorter than the asset's useful life, the financial appraisal must calculate a residual value.

The Guidelines give the following examples of methods used for estimating residual values:

· Observation of a traded market;· Professional residual value appraisal; and· Valuation of an annuity.

However, none of these examples is appropriate for the MAAS Presence. There is no second hand market from which to observe the market residual value of museums of a similar age, nor are there professionals who specialise in the valuation of these assets. As the MAAS Presence is a loss making enterprise, the valuation of annuity approach is also not appropriate.

Instead, the financial appraisal assumes the MAAS Presence will continue to operate and the residual value of the asset is therefore its replacement value. In the absence of a traded market, the financial appraisal uses the projected written down value as a proxy for its replacement value.

The RLB Riders Digest 44th Edition provided the assumptions used to calculate the projected written down value. Table 16 outlines these assumptions below.Table 16: Written Down Value Assum • lionsDescription % of Building Cost Service Life

Structure

Substructure 3.50% 58 years

Floors, columns etc. 25.00% 62 years

Roof 5.00% 57 years

External Cladding

External walls 15.00% 50 years

Windows 2.00% 32 years

Roof coverings 2.00% 35 years

Internal fit out

Walls and screens 6.00% 27 years

Fitments 2.00% 15 years

Floors exd. Carpet 1.50% 29 years

Ceilings 2.50% 15 years


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Description % of Building Cost Service Life

Carpet 3.00% 10 years

Building Services

Air conditioning 10.00% 24 years

Hydraulics 2.50% 49 years

Fire services 4.00% 24 years

Electrical services 9.00% 24 years

Lift Services 7.00% 29 years


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3 ResultsThis section sets out the results of the financial appraisal.

3.1 CapitalThe capital component of the project includes construction costs and life cycle costs. Table 17 presents the nominal and present value of each option's capital result.Table 17: Capital Results

Option Option 1 Option 2 Option 3

Nominal

Construction $431.40m $524.04m $387.45m

Life Cyde $105.02m $113.68m $143.95m

Total $536.42m $637.72m $531.40m

NPV 0 6.88%

Construction $329.65m $397.65m $299.95m

Life Cyde $27.57m $29.81m $39.32m

Total $357.22m $427.47m $339.27m

Table 17 shows the mixed use development is the cheapest from a capital perspective, followed by Option 3 including a Lyric theatre. Re-purposing and re-fitting the heritage building to function entirely as a museum is the most expensive option from a capital perspective.

3.2 MAAS Cash FlowsTable 18 presents the net operating position results for each option, with a negative result indicating a net cost to MAAS.Table 18: Operating Cash Flow Results


Nominal

Revenue $227.71m $254.40m $227.71m

Operating Expenses -$361.39m -$469.97m -$267.04m

Net Operating Position -$133.68m -$215.57m -$39.33m

NPV @ 6.88%

Revenue $81.55m $90.96m $81.55m



Option 3 is shown to represent the lowest net present cost to the State. This is expected given the reduced scope of the MAAS Presence. Figure 2 below illustrates the operating position of each facility solution over the project term.


Figure 2: Operating Position

-

-$4,000,000.00m

-$6,000,000.00m

-

$8,000,000.00

m -

.Option 1 Option 2 Option 3

TAXON CROUP

3.3 State Cash Flows

Table 19 presents the State cash flows for each option.

Table 19: Transition 0 • eratin Cost Results


Nominal

Capital contribution from operator $300.00m

Annual lease payment from Operator $2.00m

Commercial Lease $58.02m $59.64m

Building Maintenance -$7.91m -$9.44m -$7.30m

Total $50.11m -$9.44m $354.35m

NPV 0 6.88%

Capital contribution from operator $201.19m

Annual lease payment from Operator $0.77m

Commercial Lease $21.07m $21.66m

Building Maintenance -$2.87m -$3.43m -$2.65m

Total $18.20m -$3.43m $220.97m

Table 19 shows the commercial lease revenue and capital contribution provide significant sources of revenue to the State that can offset the MAAS Presence operating position and the capital cost associated with each option.

3.4 Residual Value

Table 20 presents the residual value included in the evaluation of each option.

Table 20: Residual Value ResultsOption Option 1 Option 2 Option 3

CIPMO I Ultimo Presence Project Financial Appraisal Page IQ

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Nominal $239.58m $291.03m $215.17m

NPV @ 6.88% $45.36m $55.10m $40.74m

Consistent with the capital results, Option 2 has the highest residual value.

3.5 SummaryTable 21 presents the overall net present cost of each option. Table 21: Overall NPC Summ


NPV @ 6.88%

Revenue $81.55m $90.96m $81.55m



State Cash Flows $18.20m -$3.43m $220.97m

Capital -$357.22m -$427.47m -$339.27m

Residual Value $45.36m $55.10m $40.74m

Total -$342.90m -$455.04m -$93.17m

Option 3 is shown to represent the lowest net present cost to the State. It is preferred based on both the operating position of the MAAS presence and other State cash flows.


PAXON GROH'

4 Sensitivity

The Guidelines stipulate that the critical assumptions subject to uncertainty should be altered one at a time to test their impact on final project outcomes.

In the MAAS Presence project, the main areas of uncertainty relate to the following key assumptions:

· The visitation forecasts;· The impact of the MAAS Presence on sponsorships;· The magnitude of synergies relating to marketing and development; and· The magnitude of synergies relating to general and administrative expenses.

Percentage changes were applied to each of these assumptions to ascertain the impact on the project's NPV.

4.1 Visitation Forecasts

Table 22 presents the results of the visitation forecast sensitivity. Under this sensitivity, the annual number of visitors was altered over the project life, to determine the effect of visitation levels above or below the forecast.

Table 22: Visitation Forecast Sensitivity — NPC Summary


Reduce 10% -$346.66m -$459.75m -$96.94m

Reduce 5% -$344.78m -$457.40m -$95.06m

No change -$342.90m -$455.04m -$93.17m

Increase 5% -$341.01m -$452.69m -$91.29m

Increase 10% -$339.13m -$450.34m -$89.41m

Table 22 shows that the results are not sensitive to visitation forecast.

4.2 Sponsorship

Table 23 presents the results of the venue hire sensitivity, where the impact of the MAAS Presence on the level of sponsorship revenue (relative to the historical performance of the Powerhouse in Ultimo) is varied.

Table 23: Sponsorship Sensitivity — NPC Summary


Reduce 10% -$343.01m -$455.18m -$93.28m

Reduce 5% -$342.95m -$455.11m -$93.23m

No change -$342.90m -$455.04m -$93.17m

Increase 5% -$342.84m -$454.98m -$93.12m

Increase 10% -$342.79m -$454.91m -$93.06m

Table 23 shows that results are not sensitive to the sponsorship adjustment.

CIPMO I Ultimo Presence Project Financial Appraisal Page. 21

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4.3 Marketing and DevelopmentTable 24 presents the results of the marketing and development sensitivity. This sensitivity tests the impact of varying synergies relating to marketing and development expenses.

Table 24: Marketin: and Develo • ment Sensitivi

Option `I- NPC Summ

Option 2 Option 3

Reduce 10% -$343.51m -$455.66m -$93.79m

Reduce 5% -$343.20m -$455.35m -$93.48m

No change -$342.90m -$455.04m -$93.17m

Increase 5% -$342.59m -$454.74m -$92.87m

Increase 10% -$342.28m -$454.43m -$92.56m

Table 24 shows that results are not sensitive to the sponsorship adjustment, with minimal change to results.

4.4 General and AdministrationTable 25 presents the results of the general and administration sensitivity. This sensitivity tests the impact of varying synergies relating to general and administrative expenses.

Table 25: General and Administration Sensitivity-NPC Summary


Reduce 10% -$343.31m -$455.46m -$93.59m

Reduce 5% -$343.11m -$455.25m -$93.38m

No change -$342.90m -$455.04m -$93.17m

Increase 5% -$342.69m -$454.83m -$92.96m

Increase 10% -$342.48m -$454.62m -$92.75m

This final sensitivity also shows the ranking of the options does not change.


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MelbourneLevel 27, 101 Collins Street Melbourne VIC 3000Telephone: +61 3 9111 0046 Facsimile: +61 3 9111 0045

Sydney

Level 57, MLC Centre, Martin Place Sydney NSW 2000Telephone: +61 2 8355 3690 Facsimile: +61 2 8355 3689

www.paxongroup.com.au

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