06 financial
DESCRIPTION
Slides for urban transport course: http://www.eng.ukm.my/riza/UrbanTransport/UrbanTransport.htmTRANSCRIPT
Urban Urban TransportTransport
Financial AnalysisRiza Atiq bin O.K. Rahmat
Financial AnalysisFinancial Analysis• Spending People’s Money to carry out
transport projects• Source of fund
o Federal government grantso Bondo Loans o User finance (Toll, ticket)o Land use contributions by developers
Project Purposes• Capacity for service quality • Capacity for quantity, growth • Access to intermodal facilities, ports • Access to land use • Investments to reduce operations
costs
Net Present Value Net Present Value (NPV)(NPV)
http://www.investopedia.com/terms/n/npv.asp• An approach used in capital budgeting where the
present value of cash inflow is subtracted from the present value of cash outflows.
• NPV compares the value of a dollar today versus the value of that same dollar in the future, after taking inflation and return into account.
• If the NPV of a prospective project is positive, then it should be accepted. However, if it is negative, then the project probably should be rejected because cash flows are negative.
NPVNPV
nn
i
MNPV
)1(
where i = Discount rateMn= Cash Flow n = the n th period
Cost Benefit Analysis
http://www2.sjsu.edu/faculty/watkins/cba.htm
• Cost-Benefit Analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs to the community of projects to establish whether they are worthwhile. These projects may be dams and highways or can be training programs and health care systems.
Internal Rate of Return (irr)
http://www.investopedia.com/terms/i/irr.asp/#axzz226PW7TFhttp://www.investopedia.com/terms/i/irr.asp/#axzz226PW7TF
ww• The discount rate often used in capital budgeting that
makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.
IRR is sometimes referred to as "economic rate of return (ERR)."
Read more: http://www.investopedia.com/terms/i/irr.asp/#ixzz226SviIOO
irrirr
N
nnnn
irr
CB
1
0)1(
Bn = Benefit at the end of n period. Cn = Cost at the end of n period irr = Internal Rate of Return
Value of TimeValue of Time• The value of time is the opportunity cost of
the time that a traveller spends on his/her journey. In essence, this makes it the amount that a traveller would be willing to pay in order to save time, or the amount they would accept as compensation for lost time (Wikipedia).
• Value of time = β/α
)1
1TimeCostDe
P
Vehicle Operating Cost
• Out of pocket costo Fuelo Lubricanto Tyreo Maintenance
Vehicle Operating Cost (RM/km) Motor-
cyclecar Van lorry bus
Fuel 0.036 0.180 0.220 0.350 0.350
Lubricant 0.003 0.021 0.030 0.105 0.090
Tyre 0.003 0.024 0.030 0.350 0.350
Maintenance
0.030 0.200 0.250 0.950 1.005
Total0.072 0.425 0.530 1.755 1.795
ExampleExampleA state government has a plant to construct a 21 km road. The project cost is estimated to be RM 770,000,000.00 and the project duration is 2 years.
Direct benefits of the proposed road are reduction in vehicle operating cost and travel time which are estimated to be 1,212,000 vehicle-km/day and 27,750 men-hr/day. Average travel time value is RM 11.15/hr and the vehicle operating cost is 21.5 cents per kilometer.
Both reduction are forecasted to be increasing steadily at the rate of 9% per annum. Road maintenance cost is estimated to be RM 2,500,000 per annum and will keep on increasing at the rate of 10.5% per annum. The project will be finance by the federal government and the pay back period is 12 years. Discount rate is 8%.
Ascertain whether the project is economically viable.
SolutionSolutionConstruction period: 2 years => construction cost / year = RM 770m / 2 =RM 385m.
Reduction in vehicle operating cost = 1,212,000 * RM 0.215 = RM 260,580 per day Reduction in travel time (in monitory term) = 27,750 * RM 11.15 = RM 309,412.50 per day
Total reduction per annum = ( RM 260,580 + RM 309,412.50 ) x 365= RM 208,047,262.50
Year Cost Benefit NPV cost NPV benefit Cost Stream
0 385,000,000.00 385,000,000.00 -385,000,000.00
1385,000,000.00
356,481,481.48 -385,000,000.00
2 2,500,000.00 208,047,262.50 2,143,347.05 178,366,994.60 205,547,262.50
3 2762500.00 226771516.13 2,192,961.57 180,018,540.85 224,009,016.13
4 3052562.50 247180952.58 2,243,724.57 181,685,379.19 244,128,390.08
5 3373081.56 269427238.31 2,295,662.63 183,367,651.22 266,054,156.75
6 3727255.13 293675689.76 2,348,802.97 185,065,499.84 289,948,434.63
7 4118616.91 320106501.83 2,403,173.41 186,779,069.28 315,987,884.92
8 4551071.69 348916087.00 2,458,802.43 188,508,505.11 344,365,015.31
9 5028934.22 380318534.83 2,515,719.15 190,253,954.23 375,289,600.61
10 5556972.31 414547202.96 2,573,953.39 192,015,564.92 408,990,230.65
11 6140454.40 451856451.23 2,633,535.64 193,793,486.81 445,715,996.83
765,291,164.29 1,859,854,646.03
B/C Ratio= 2.43 irr= 27.6%
AnalysisAnalysis
The project is viable because B/C ratio > 1 and irr=27.6%