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Project Viability Assessment Worked Example

Project Viability Assessment Worked Example

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Worked example of project viability assessment using Benefit cost ratio and Net present value methods
Worked example of project viability assessment using Benefit cost ratio and Net present value methods

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Published by: okucuanthony on May 12, 2014
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COURSE WORK

Question 1
A new highway has been proposed between Kampala and Entebbe at a construction cost of 700bn
shillings. The highway has a 20 year design life. Construction work will require diversion of traffic from
the existing motorway which will cost up to 80bn shillings. The project will also displace so many people
whose cost of resettlement amounts to 6bn shillings. The new highway will lead to the permanent closure
of the existing motorways which will otherwise require 5bn shillings for annual maintenance.
Recoverable and reusable resources from closed motorways and vacated properties are valued at 12bn
which can be used on the new highway. The new highway is expected to yield taxes from vehicles using
it at 5,000/= per ton per mile and the existing motorways will be closed and a total of 50 annual ton miles
will be expected. It is also expected that the general tax revenue will decrease by 30m each year because
of the new highway. On the other hand the new highway is estimated to cost 5bn per year to maintain.
Estimate the economic viability of the highway relative to the existing motorways assuming the project
will be funded by 12% per year interest bearing bonds with interest compounded annually and the average
annual inflation rate being 4%.

Solution to question 1
COSTS:
 Construction costs, assume two year construction period and equal distribution of cost over the
two years, i.e., Year 0 = 350bn and Year 1 = 350bn
 Diversion of the motorway = 80bn in the first year (Year 0)
 Resettlement = 6bn in Year 0
 Maintenance = 5bn per year but begins only after the completion of the construction, say Year 2
 Loss of taxes = 0.03bn per year and this loss is realizes as a result of the new highway (possibly
due to traffic diversion from other motorways) assume it starts in Year 2
BENEFITS:
 Recovery and reuse of resources = 12bn in the first year (Year 0)
 Revenue from road tolls = 50 ton miles per year x 5,000/= per ton mile = 0.00025bn per year,
beginning in Year 2 when the road is opened to public.
 Accruals from the maintenance of closed motorways at 5bn per year, which begins in the 1
st
year
(year 0)
INTEREST RATE:
Assume the interest rate given (12%) is nominal rate;
Nominal rate, i = 12%; Inflation rate, k = 4%; Real rate, r =?
From
r = [(1+i)/ (1+k)] – 1
r = [(1 + 0.12)/ (1 + 0.04)] – 1 = 0.0769 (or 7.69%)

This is the interest rate to be used for discounting the future values
From the discounting formula:

Where:
 PV = Present Value
 FV = Future Value
 r = real interest rate (after adjusting for inflation)
 t = period in years
The table below shows the Economic Viability assessment using the Net Present Value (NPV) Method,
derived from:

Where B
t
and C
t
are benefits and cost in the t th year respectively.
USING NET PRESENT VALUE (NPV) METHOD


YEAR
COSTS IN BN SHS BENEFITS IN BN SHS
C
O
N
S
T
R
U
C
T
I
O
N


D
I
V
E
R
S
I
O
N

R
E
S
E
T
T
L
E
M
E
N
T

M
A
I
N
T
E
N
A
N
C
E

L
O
S
T

G
E
N
E
R
A
L

T
A
X
E
S

T
O
T
A
L

C
O
S
T
S

R
E
C
O
V
E
R
Y

&

R
E
U
S
E

O
F

R
E
S
O
U
R
C
E
S

R
E
V
E
N
U
E

F
R
O
M

T
O
L
L
S


A
C
C
R
U
A
L
S

F
R
O
M

M
T
C
E

O
F

C
L
O
S
E
D

M
O
T
O
R
W
A
Y
S

T
O
T
A
L

B
E
N
E
F
I
T
S

N
E
T

B
E
N
E
F
I
T
S

N
E
T

P
R
E
S
E
N
T

V
A
L
U
E

0 350 80 6 0 0 436 12 5 17.00000 -419.00000 -419
1 350 0 0 350 5 5.00000 -345.00000 -320.364
2 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.02565
3 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.02382
4 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.02212
5 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.02054
6 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01907
7 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01771
8 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01645
9 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01527
10 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01418
11 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01317
12 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01223
13 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01136
14 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.01054
15 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.00979
16 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.00909
17 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.00844
18 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.00784
19 5 0.03 5.03 0.00025 5 5.00025 -0.02975 -0.00728

NPV = -739.629


NPV < 0 THEREFORE PROJECT NOT VIABLE

The table below shows the Economic Viability assessment using the Benefit Cost Ratio (BCR) Method,
derived from:

Where B
t
and C
t
are benefits and cost in the t th year respectively.
USING BENEFIT COST RATIO (BCR) METHOD

YEAR
COSTS IN BN SHS BENEFITS IN BN SHS
C
O
N
S
T
R
U
C
T
I
O
N


D
I
V
E
R
S
I
O
N

R
E
S
E
T
T
L
E
M
E
N
T

M
A
I
N
T
E
N
A
N
C
E

L
O
S
T

G
E
N
E
R
A
L

T
A
X
E
S

T
O
T
A
L

C
O
S
T
S

R
E
C
O
V
E
R
Y

&

R
E
U
S
E

O
F

R
E
S
O
U
R
C
E
S

R
E
V
E
N
U
E

F
R
O
M

T
O
L
L
S


A
C
C
R
U
A
L
S

F
R
O
M

M
T
C
E

O
F

C
L
O
S
E
D

M
O
T
O
R
W
A
Y
S

T
O
T
A
L

B
E
N
E
F
I
T
S

B
t
/
(
1
+
r
)
^
t

C
t
/
(
1
+
r
)
^
t

0 350 80 6 0 0 436 12 5 17.00000 17.000000000 436
1 350 0 0 350 5 5.00000 4.642956635 325.007
2 5 0.03 5.03 0.00025 5 5.00025 4.311624833 4.337278
3 5 0.03 5.03 0.00025 5 5.00025 4.003737425 4.027558
4 5 0.03 5.03 0.00025 5 5.00025 3.717835848 3.739956
5 5 0.03 5.03 0.00025 5 5.00025 3.452350124 3.472891
6 5 0.03 5.03 0.00025 5 5.00025 3.205822383 3.224896
7 5 0.03 5.03 0.00025 5 5.00025 2.976898860 2.994611
8 5 0.03 5.03 0.00025 5 5.00025 2.764322463 2.780769
9 5 0.03 5.03 0.00025 5 5.00025 2.566925864 2.582198
10 5 0.03 5.03 0.00025 5 5.00025 2.383625094 2.397807
11 5 0.03 5.03 0.00025 5 5.00025 2.213413589 2.226583
12 5 0.03 5.03 0.00025 5 5.00025 2.055356662 2.067585
13 5 0.03 5.03 0.00025 5 5.00025 1.908586370 1.919942
14 5 0.03 5.03 0.00025 5 5.00025 1.772296750 1.782841
15 5 0.03 5.03 0.00025 5 5.00025 1.645739391 1.655531
16 5 0.03 5.03 0.00025 5 5.00025 1.528219325 1.537312
17 5 0.03 5.03 0.00025 5 5.00025 1.419091211 1.427534
18 5 0.03 5.03 0.00025 5 5.00025 1.317755790 1.325596
19 5 0.03 5.03 0.00025 5 5.00025 1.223656598 1.230937

66.110215213 805.7388

BENEFIT-COST
RATIO = 0.08204919 < 1

BCR < 1 THEREFORE THE PROJECT IS NOT
VIABLE
Question 2:
A contractor engaged by MoWT on a road Maintenance project presented the following certified works
for payment over a period of 6 months:
Month 1 2 3 4 5 6
Amount 20M 30M 43M 35M 35M 40M

If the cost of the work done for each month is 80% of the certified value and the presented request
excluded 10% of money retained for liability to be paid 3 months after the 6 month; how much money
does the contractor need to mobilize to do the project assuming the certified projects are paid within one
month of presentation.

Solution 2:

Month
ITEMS 1 2 3 4 5 6 7 8 9
Certified works in
Million Shs.
20 30 43 35 35 40

Total (including
Retention)
22.2222222 33.333 47.7778 38.889 38.889 44.444 0 0 0
Retention 2.22222222 3.3333 4.7778 3.889 3.889 4.444 0 0 0
Cost of work 16 24 34.4 28 28 32
Presented Request 18 27 38.7 31.5 31.5 36 0 0 0
Cash out 16 24 34.4 28 28 32 0 0 0
Cash Outflow 16 24 34.4 28 28 32 0 0 0
Cash in 18 18 27 38.7 31.5 31.5 0 0 0
Retention paid 0 0 0 2.222 3.333 4.778 3.889 3.889 4.444
Total Cash inflow 18 18 27 40.922 34.833 36.278 3.889 3.889 4.444

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