COST ENGINEERING

ASSIGNMENT 2
INTRODUCTION
This assignment requires value engineering and the preparation of a project business case based
on NPV analysis and sensitivity analysis.

INSTRUCTIONS
 Submission deadline: 5pm 21st October 2019.
 Submit all your answer in one document.
 This coursework is an individual piece of work and students must NOT work in
collusion or in teams. Standard University guidelines for plagiarism and collusion
apply.
 This assignment has been developed in order to meet the needs of the various
engineering disciplines of students undertaking the course.

PROJECT DETAILS
You are an engineering company with a track record in design and construction of multi-storey
car-park facilities. A university has approached you with a possible opportunity to finance,
build, own and operate a new car-park facility on terms of a 20 year concession period.

Information available from the client is summarised as follows:

 The existing car parking arrangements comprise 300 on grade spaces for customers.
These are inadequate for the client, and due to growth predictions a multi-level car park
of 1,200 spaces is required.
 Project is located in Auckland NZ.
 Academic year is split into 40 weeks of teaching and 12 weeks of holiday.
 Number of staff = 700 (constant all year round).
 Number of students = 5,500 during term time and = 1,000 during holiday times.
 A recent survey of students and staff indicates that a parking charge of approximately
$3.00 per hour would be acceptable.
 No funds are available from the client for the development of support infrastructure
such as car parking. However the client is prepared to enter a long term lease for land
already owned by the them at a peppercorn rent of $1 per annum. At the end of the 20
concession period the ownership of the car-park building is transferred to the University
for a pre-agreed sale price of $1.
 Under the Build / Own / Operate / Transfer arrangement the company collects all
revenues and is liable for all risks and costs associated with the car-park facility.
 Client is open to suggestions for project innovations.

Following an initial discussions with the client you determine that the following assumptions
are reasonable:
 Occupancy Profile Assumed Estimated Occupancy Level
Times
Week Day Profile Weekend Profile
Term Holiday Term Holiday
Day 9am -5pm 75% 60% 40% 30%
Evening 5pm-9pm 60% 40% 30% 20%
Night 9pm-9am 5% 0% 0% 0%

Usage profile Charge Estimated Profile (week days and weekends)

No of Hours incl GST Daytime Evening Night
1 $3.00 10% 30% 25%
2 $6.00 40% 40% 25%
3 $9.00 40% 20% 25%
4 $12.00 10% 10% 25%

The client confirms that there is also potential revenue from parking fines. The client prefers a
pay and display method of ticketing (i.e. no entry /exit barriers). The client would be agreeable
to a fine of approximately $60 for failing to display a ticket. It is estimated that approximately
2% of users would not pay and display their tickets, of which fines would be successfully
collected from 15% of defaulters.

From your expertise in building, owning and operating car-parks in New Zealand you collect
the following data:

PROJECT CAPEX ESTIMATES Rate Estimates

o
Number of spaces N 1200
Area per park m2 27.5
Area of parking m2 33,000
Construction cost /m2 parking $/m2 $1,200
Professional Fees (%) % 10%
Other Costs
Consents Item $200,000
Legal Costs Item $200,000
Development levy Item $600,000
Major refurb cost allowance in Yr 10 Item $2,000,000

OPEX ESTIMATES Estimates

General Operating costs for the car park per annum (excl GST) $100,000
Salary Costs (Car-park attendants – part time) per annum (incl GST) $50,000
Head office overheads (incremental) per annum (excl GST) $20,000
Initial working capital required (inc GST) $100,000

ADDITIONAL INFORMATION Estimates

Revenue and cost inflation rate 3.50%
Tax rate 30.0%
Required rate return on equity 20.0%
Cost of debt 9.0%
Maximum Debt Funding available from bank 80%
GST rate 15%
Your company has recently spent $1,200,000 researching and developing a new type of re-
useable floor formwork. This work is not yet complete and is estimated to cost a further
$500,000 to bring to successful competition. There is a 50% chance that the research and
development will be complete in time to implement for this project. If successful it is estimated
will save 1% to 2% of the construction costs for all future car park projects constructed by your
company.

The company uses a straight line depreciation method.

The design and construction time period for the car-park is estimated to be 12 months from
start to completion.

PART A
1. Complete a NPV analysis for the project using all the information available.

2. Prepare the analysis using a spreadsheet (MS Excel). Clearly label the columns and
rows in the spreadsheet and provide sufficient annotation to illustrate your logic and
methods of analysis.

3. Prepare a cumulative NPV chart (plotting NPV against years), showing the NPV break-
even point.
(10 Marks)

PART B
1. Identify the key assumptions of your results from Part A and complete sensitivity
analyses of these key assumptions. Identify the following alternative scenarios:
a. Optimistic Scenario
b. Pessimistic Scenario

2. Document assumptions made for the alternative scenarios and re-calculate the project
NPV's for the scenarios.
(9 Marks)

PART C
1. Prepare a Business Case for the project. Identify possible innovative alternative options
to maximise shareholder value for your organisation. Consider risks (opportunities and
threats). Make recommendations.

2. Submit both a detailed business case (maximum 20 pages A4 excluding Appendices)

and a one page summary (highlighting the key features of the business case).

(21 Marks)