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TITLE :

URBAN TRANSPORTATION

ASSIGNMENT 3

NAME : MUHAMMAD BIN RAMLAN

MATRIX NO : P 57600

SUBJECT : KKKA 6564

YEAR : 2011/2012

LECTURER : PROF IR DR RIZA ATIQ O.K. RAHMAT

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QUESTION ASSIGNMENT 3

1. A state government has a plan to construct a 25 km road. The project cost is estimated to

be RM 900,000,000.00 and the project duration is 2 years.

Direct benefits of the proposed road are reduction in vehicle operating cost and travel

time which is estimated to be 1,400,000 vehicle-km/day and 35,000 men-hr/day. Average

travel time value is RM 25.00/hr and the vehicle operating cost is 25 cents per kilometer.

Both reductions are forecasted to be increasing steadily at the rate of 9% per annum.

Road maintenance cost is estimated to be RM 2,990,000 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 payback period is 12 years.

Discounted rate is 8%.

Ascertain whether the project is economically viable.

2. An 95 km highway is planned to be constructed between a new industrial estate with a

port. Estimated cost of the project is RM 998 million and the construction duration is 2

years. The highway project will be privatised and the concession period is 17 years.

Toll collection is forecasted at about RM 150 million during the first year of its operation

and is expected to increase at a rate of 9% per annum.

Maintenance cost and operation cost are about RM 6.7 million per annum and are

expected to grow at a rate of 6.5% per annum.

The concession holder will finance 10% of the project cost and 90% will be financed by a

local bank based on non-interest scheme (Al-bai bitaman ajil). Financing period is 12

years and repayment will start after the highway is opened for traffic or two years after

signing the concession agreement, whichever is earlier. The repayment is RM

13,800,000.00 per month.

(Use 333 annualisation factor and assume the traffic volume is uniform throughout the

year)

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(a) Compute NPV cost and NPV income for the concession period. Use 8% discount

rate. (8 marks).

(b) Compute Benefit Cost ratio. (2 marks).

(c) Prepare computation table as in (a) with 19% discount rate. (8 marks).

(d) Compute internal rate of return (IRR). (2 marks).

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SOLUTION ASSIGNMENT 3

Question 1

Given:

Cost of the project : RM 900,000,000.00

Construction period : 2 years

Construction cost per year : RM 450,000,000.00

Project payback period : 12 years

Discount rate (8% per year) : 0.08

Benefit on vehicle operating cost (VOC);

Vehicle operating : 1,400,000 vehicle-km/day

Operating cost : RM 0.25/km

VOC reduction : RM 350,000.00/day

Benefit on time saving;

User : 35,000.00 men-hr/day

Time value : RM25/hr

Time saving value : RM 875,000.00/day

Total Benefit per year ;

Total VOC reducing and time saving : 1,225,000.00

For per annum (365days) : 447,125,000.00

Increase rate (9% per year) : 0.09

Maintenance cost;

Cost per year : RM 2,990,000.00

Increase rate (10.5% per year) : 0.105

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Years Construction cost Maintenance cost NPV cost (C) Total benefit NPV Benefit (B) Cost Stream

0 450,000,000.00 450,000,000.00 (450,000,000.00)

1 450,000,000.00 416,666,666.70 (450,000,000.00)

2 2,990,000.00 2,563,443.07 7,125,000.00 383,337,620.03 444,135,000.00

3 3,303,950.00 2,622,782.03 487,366,250.00 386,887,042.44 484,062,300.00

4 3,650,864.75 2,683,494.58 531,229,212.50 390,469,329.87 527,578,347.75

5 4,034,205.55 2,745,612.51 579,039,841.63 394,084,786.62 575,005,636.08

6 4,457,797.13 2,809,168.35 631,153,427.37 397,733,719.83 626,695,630.24

7 4,925,865.83 2,874,195.40 687,957,235.83 401,416,439.46 683,031,370.00

8 5,443,081.74 2,940,727.70 749,873,387.06 405,133,258.34 744,430,305.32

9 6,014,605.33 3,008,800.10 817,361,991.90 408,884,492.22 811,347,386.57

10 6,646,138.88 3,078,448.25 890,924,571.17 412,670,459.74 884,278,432.28

11 7,343,983.47 3,149,708.63 971,107,782.57 416,491,482.51 963,763,799.10

895,143,047.30 3,997,108,631.06

(B/C) Benefit/Cost-ratio 4.47 IRR = 47%

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Using discount rate of 47%:

Years Construction cost Maintenance cost NPV cost (C) Total benefit NPV Benefit (B) Cost Stream

0 450,000,000.00 450,000,000.00 (450000000.00)

1 450,000,000.00 306,122,448.98 (450000000.00)

2 2,990,000.00 1,383,682.72 447,125,000.00 206,916,099.77 444,135,000.00

3 3,303,950.00 1,040,115.25 487,366,250.00 153,427,584.19 484,062,300.00

4 3,650,864.75 781,855.34 531,229,212.50 113,766,031.81 527,578,347.75

5 4,034,205.55 587,721.19 579,039,841.63 84,357,125.63 575,005,636.08

6 4,457,797.13 441,790.42 631,153,427.37 62,550,521.72 626,695,630.24

7 4,925,865.83 332,094.16 687,957,235.83 46,380,999.10 683,031,370.00

8 5,443,081.74 249,635.40 749,873,387.06 34,391,353.08 744,430,305.32

9 6,014,605.33 187,651.10 817,361,991.90 25,501,071.33 811,347,386.57

10 6,646,138.88 141,057.46 890,924,571.17 18,908,957.65 884,278,432.28

11 7,343,983.47 106,032.99 971,107,782.57 14,020,927.78 963,763,799.10

761,374,085.01 760,220,672.06

(B/C) Benefit/Cost-ratio 1.00 IRR = 47%

When the B/C= 1 means the IRR = Discount rate = 47%. Therefore, this project is economically viable because the IRR is very high.

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Question 2

Given:

Length of Highway : 95km

Project Cost : RM 998,000,000.00

Concession period : 17 years

Toll Revenue : RM 150,000,000.00/year

Toll Revenue growth (9% per year) : 0.09

Construction period : 2 years

Maintenance cost : RM 6,700,000.00/years

Maintenance cost growth (6.5% per year) : 0.065

Financing by company : 10%

Financing by bank : 90%

Financing duration : 12years

Repayment to bank : RM 13,800,000.00/month @ RM 165,600,000.00/year

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(a) Compute NPV cost and NPV income for the concession period. Use 8% discount rate. (8 marks).

Years Construction cost Repayment NPV cost (C) Total benefit NPV Benefit (B) Cost Stream

0 499,000,000.00 499,000,000.00 (499,000,000.00)

1 499,000,000.00 462,037,037.04 (499,000,000.00)

2 6,700,000.00 165,600,000.00 147,719,478.74 150,000,000.00 128,600,823.05 (22,300,000.00)

3 7,135,500.00 165,600,000.00 137,123,009.07 163,500,000.00 129,791,571.41 (9,235,500.00)

4 7,599,307.50 165,600,000.00 127,306,661.50 178,215,000.00 130,993,345.22 5,015,692.50

5 8,093,262.49 165,600,000.00 118,212,715.89 194,254,350.00 132,206,246.56 20,561,087.51

6 8,619,324.55 165,600,000.00 109,787,726.75 211,737,241.50 133,430,378.47 37,517,916.95

7 9,179,580.64 165,600,000.00 101,982,206.59 230,793,593.24 134,665,844.94 56,014,012.59

8 9,776,253.39 165,600,000.00 94,750,332.79 251,565,016.63 135,912,750.91 76,188,763.24

9 10,411,709.86 165,600,000.00 88,049,676.06 274,205,868.12 137,171,202.31 98,194,158.27

10 11,088,471.00 165,600,000.00 81,840,949.19 298,884,396.25 138,441,306.03 122,195,925.26

11 11,809,221.61 165,600,000.00 76,087,774.24 325,783,991.92 139,723,169.98 148,374,770.30

12 12,576,821.02 165,600,000.00 70,756,467.10 355,104,551.19 141,016,903.03 176,927,730.17

13 13,394,314.38 165,600,000.00 65,815,837.93 387,063,960.80 142,322,615.10 208,069,646.41

14 14,264,944.82 4,856,657.97 421,899,717.27 143,640,417.09 407,634,772.45

15 15,192,166.23 4,789,204.38 459,870,691.82 144,970,420.95 444,678,525.59

16 16,179,657.04 4,722,687.66 501,259,054.09 146,312,739.67 485,079,397.05

17 17,231,334.74 4,657,094.77 546,372,368.95 147,667,487.26 529,141,034.21

2,199,495,517.64

2,206,867,221.98

(B/C) Benefit/Cost-ratio 1.00 IRR = 8%

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(b) Compute Benefit Cost ratio. (2 marks).

Benefit/cost ratio = 2,206,867,221.98 / 2,199,495,517.64

= 1.00

(c) Prepare computation table as in (a) with 19% discount rate. (8 marks).

Years Construction cost Repayment NPV cost (C) Total benefit NPV Benefit (B) Cost Stream

0 499,000,000.00 499,000,000.00 (499,000,000.00)

1 499,000,000.00 419,327,731.09 (499,000,000.00)

2 6,700,000.00 165,600,000.00 121,672,198.29 150,000,000.00 105,924,722.83 (22,300,000.00)

3 7,135,500.00 165,600,000.00 102,503,977.37 163,500,000.00 97,023,485.62 (9,235,500.00)

4 7,599,307.50 165,600,000.00 86,369,082.42 178,215,000.00 88,870,251.53 5,015,692.50

5 8,093,262.49 165,600,000.00 72,786,052.38 194,254,350.00 81,402,163.17 20,561,087.51

6 8,619,324.55 165,600,000.00 61,349,998.62 211,737,241.50 74,561,645.25 37,517,916.95

7 9,179,580.64 165,600,000.00 51,720,410.51 230,793,593.24 68,295,960.78 56,014,012.59

8 9,776,253.39 165,600,000.00 43,610,904.76 251,565,016.63 62,556,804.41 76,188,763.24

9 10,411,709.86 165,600,000.00 36,780,608.45 274,205,868.12 57,299,930.09 98,194,158.27

10 11,088,471.00 165,600,000.00 31,026,915.19 298,884,396.25 52,484,809.92 122,195,925.26

11 11,809,221.61 165,600,000.00 26,179,395.56 325,783,991.92 48,074,321.69 148,374,770.30

12 12,576,821.02 165,600,000.00 22,094,677.63 355,104,551.19 44,034,462.72 176,927,730.17

13 13,394,314.38 165,600,000.00 18,652,143.07 387,063,960.80 40,334,087.70 208,069,646.41

14 14,264,944.82 1,249,144.37 421,899,717.27 36,944,668.57 407,634,772.45

15 15,192,166.23 1,117,931.73 459,870,691.82 33,840,074.57 444,678,525.59

16 16,179,657.04 1,000,501.93 501,259,054.09 30,996,370.83 485,079,397.05

17 17,231,334.74 895,407.19 546,372,368.95 28,391,633.78 529,141,034.21

1,597,337,080.55 951,035,393.46

(B/C) Benefit/Cost-ratio 0.60 IRR = 8%

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(d) Compute internal rate of return (IRR). (2 marks).

When the B/C= 1 means the IRR = Discount rate = 8% (As per question 2 (a))