# Commission Decision of 8 May 2012 on State aid SA.22668 (C 8/08 (ex NN 4/08)) (notified under document C(2012) 3025) (Only the Spanish text is authentic) (Text with EEA relevance) (2013/126/EU), Division: Conclusion

Extent: E+W+S+N.I.

Our calibrated opportunity cost of capital for the investment in CDL stands at 14,91 %. If we accept at face value the 2004 business plan proposed by CDL and LECG’s analysis, the internal rate of return of this project is 5,74 %. However, we stress that the cash flows forecasted in the 2004 business plans appear as unduly optimistic, especially taking into account the actual losses incurred by the company during the period 2002-2004. Given the information at our disposal, we can conjecture that the expected cash flows presented in the 2004 business plan represented an upper bound.
As stated in the introduction, an investor would only invest in a project with an internal rate of return larger than the opportunity cost of capital. Consequently, an investor in CDL would have required a much higher internal rate of return (i.e. at least 14,91 %) in order to invest in this project. We can conclude that the investment made in CDL did not fulfil the market economy investor principle.
With a WACC = 14,91 %, and assuming that the 2004 cash flow forecasts represent an upper limit, we computed the NPV of the project as the sum of discounted cash flows. On the basis of the submission provided by the Spanish authorities, it emerges that the 199 million investment is the sum of the cash flows in the period 2005-2007. The cash flow of the last period includes the residual value, computed using the dividend discount model:
V t = D t 1 + g r – g
Where Dt stands for the dividend to pay in year t, g is the dividend growth rate and r the discount rate.
This expression is highly sensitive to the parameters Dt and g. Obtaining accurate estimates for Dt and g is beyond the purpose of this note. For this reason, we use as a benchmark the values proposed by the Spanish authorities, namely Dt =8 651 (last period cash flow) and g = 2,553 % (the inflation rate). However, we apply our estimated discount rate of 14,91 %. On the basis of these parameter values, the project yields a negative net present value of- NPV = – 131,65 mil.
2002
2003
2004
2005
2006
2007
2008
Cash flow
-884
-1 792
-2 601
-118 177
-55 813
-25 088
4 462
Discount
1 + WACC ^2
1 + WACC
1
1/ 1 + WACC
1/ 1 + WACC ^2
1/ 1 + WACC ^3
1/ 1 + WACC ^4
14,91 %
1,3204
1,1491
1,0
0,8702
0,7573
0,6591
0,5735
DCF
-1 167,26
-2 059,19
-2 601,0
-102 843,09
-42 268,78
-16 534,56
2 559,16
2009
2010
2011
2012
2013
2014
NPV
Cash flow
5 526
6 561
6 842
8 057
8 307
80 447
Discount
1/ 1 + WACC ^5
1/ 1 + WACC ^6
1/ 1 + WACC ^7
1/ + WACC ^8
1/ 1 + /WACC ^9
1/ 1 + WACC ^10
14,91 %
0,4991
0,4344
0,378
0,329
0,2863
0,2491
DCF
2 758,17
2 849,86
2 586,3
2 650,4
2 378,07
20 041,62
-131,65

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Source: https://www.legislation.gov.uk/eudn/2013/126/annex/I/division/6 (the official version)
Page: https://openlegislation.uk/eu-decision-2013-126/annex-I/division-6
Contains public sector information licensed under the Open Government Licence v3.0. Source: legislation.gov.uk, The National Archives.