BAU 08101: Transport Cost and Finance

Test Two Duration: 45’

Assume that, UDAT has two alternatives for a new highway project. Alternative 1 addresses all future
demand until year 20 and cost TZS 140,000. Alternative 2 will be built in two stages: the first stage builds
initial capacity and cost TZS 100,000 and the second, if required will require an additional of TZS 120,000
in year N to update to full capacity. Assuming operations and maintenance costs for both alternatives are
equal and interest rate is 8%. The table shows the cash flows for each alternative if the second stage of
alternative 2 is built in year N.

Year (N) Alternative 1 (TZS) Alternative 2 (TZS)

0 140,000 220,000

4 140,000 180,000

8 140,000 165,000

12 140,000 148,000

16 140,000 135,000

20 140,000 126,000

Determine which is the best alternative by using

a) NPV and
b) Payback period