Exercise 1:

A developing country is working on a 20-year-highway project. The project is expected to increase

the inter-regional freight by 100,000 tons per year from the end of the 4 th year. Each ton of the
commodity has a market value of 800 USD. The construction of the highway is also expected to
reduce the number of traffic accident by 10 people per year, from the end of the 4th year. The
economic value of a human life is estimated at 500,000 USD/person.
The investment cost of the project is 300 million USD, divided equally among the first 3 years. At
the beginning of the 4th year, it is necessary to import some equipment that cannot be produced
domestically at a cost of 220 million USD, including 10% tariff.
From the end of the 4th year, the operating cost of the project includes 2 items:
- Materials cost: 18 million USD/year, including a tax of 3 million. The government subsidies 2
million USD for the materials. Surpose that the inputs have a displacement effect.
- Labor costs:16 million USD/year. The project employs 50% of unemployed workers who are now
receiving unemployment benefits from the government.
1. Make the financial cash flow of the project, calculate the project's NPV value if the discount rate
is 10%.

FA (mil USD) 0 1 2 3 4 … 20
Revenue         80 80 80
Investment cost 100 100 100        
Equipment cost       220      
Operation cost         34 34 34
Net benefit -100 -100 -100 -220 46 46 46
17
100 100 220 1,1 −1
NPV =−100− − − + 46 × =−161,614 milUSD
1,1 1,12 1,13 0,1 ×1,1
20

2. Make the economic cash flow of the project, calculate the value of NPV, BCR and IRR. Surpose
all costs of the project are funded by the government budget. The project's social discount rate is
5%.

CBA (mil USD) 0 1 2 3 4 … 20

Revenue         80 80 80
Accident lowering         5 5 5
Investment cost 100 100 100        
Equipment cost       200      
Operation cost         26 26 26
Net benefit -100 -100 -100 -200 59 59 59
17
100 100 200 (1+ r) −1
NPV =−100− − − +59 ×
( 1+ r) (1+r )2 (1+r )3 r ×(1+ r )20
With r = 5%: NPV = 115,89 mil USD
17
1,05 −1
85 × 20
0,05 ×1,05
BCR= =1,163
100 100 200 1,0517 −1
100+ + + +26 ×
1,05 1,052 1,053 0,05 ×1,05
20

With r1 = 7%: NPV1 = 26,151 mil USD

r2 = 8%: NPV2 = -9,871 mil USD
26,151
⇒ IRR=7 %+ ( 8 %−7 % ) × =7,711 %
26,151+9,871
3. Make conclusion about the project from the above calculation
Acording to FA, the project shouldn’t be invested because NPV < 0
Acording to CBA, the project should be invested because NPV > 0

Exercise 2:
The provincial Department of Transport is considering a new road with the following initial capital
costs that including:
- 10 tons of construction materials. The price per ton is VND 15 billion, including a tax of 1 billion
VND. The local government subsidizes 0.5 billion VND/1 ton (surpose inputs have the replacement
effect)
- 2 million working hours with the hourly wage is 15,000 VND. Employees with 60% are
unemployed with the value of rest is 8000 VND/hour.
- Imported construction machine (that is not produced domestically) at a cost of 22 billion VND, of
which 10% tariff is included.
During the operation phase, the annual operating cost is 150 million VND/year.
If this 20 km long road is built, traffic accident is estimated to be reduced by 10 billion VND/year.
Saving costs for vehicles for one trip is 37,000 VND/km and the traffic capaccity is 8500
vehicles/year.
The project also reduces the annual environmental treatment cost from 300 million VND to 100
million VND/year.
Assume that the long-run inflation is 3%/year.
The yield on government bonds is 8%, the risk is 2%, and the income tax is 20%.
On the view of cost benefit analysis, should the project be invested if the life of the project is 10
years?
 1. Initial capital cost
- Materials cost = 10x15 = 150 bil VND
- Labor cost = 2x(0,4x15+0,6x8) = 21,6 bil VND
- Machine cost = 22/1,1 = 20 bil VND
 Total capital cost = 191,6 bil VND
2. Annual perating cost = 0,15 bil VND
3. Benefit
- Accident lowering = 10 bil VND
- Saving costs = 37000x20x8500 = 6,29 bil VND
- Reduce environmental treatment cost = (300 – 100) mil = 0,2 bil VND
 Total benefit = 16,49 bil VND
 Net benefit = 16,49 – 0,15 = 16,34 bil VND

Year Nominal net benefit CPI Real net benefit

0 100
1 16,34 103 16,83
2 16,34 106,09 17,34
3 16,34 109,27 17,86
4 16,34 112,55 18,39
5 16,34 115,93 18,94
6 16,34 119,41 19,51
7 16,34 122,99 20,10
8 16,34 126,68 20,70
9 16,34 130,48 21,32
10 16,34 134,39 21,96
SDR = (8+2-3)x(1-0,2) = 5,6%
16,83 17,34 21,96
NPV =−191,6+ + +…+ =−48,77 bil VND
1,056 1,056 2
1,05610

Exercise 3:
Consider the set of NPV values of a mining company with 2 variables:

Mining output (bil Land- restoration cost (Triệu USD)

ton/year)

5 (low) 7 (the best) 9 (high)

100 (low) 90
 120 (the best) 115 110 96

150 (high) 130

- At the best land restoration cost: Calculate the elasticity of NPV to output from the best to low,
from the best to high
- At the best mining output: Calculate the elasticity of NPV to cost from the best to low, from the
best to high
Make your recommendation
a. At the best land restoration cost:
( 110−90 ) :110
The elasticity of NPV ¿ output ¿ the best ¿ low= =1,091
( 120−100 ) :120
( 110−130 ) :110
The elasticity of NPV ¿ output ¿ the best ¿ high= =0,727
( 120−150 ) :120
b. At the best mining output
( 110−115 ) :110
The elasticity of NPV ¿ cost ¿ the best ¿ low= =−0,159
( 7−5 ) :7
( 110−96 ) : 110
The elasticity of NPV ¿ cost ¿ the best ¿ high= =−0,445
( 7−9 ) :7