Econ 326

Econ 326

Scenario:

You are required to perform a project appraisal oftwo options

for a proposed new road. The road will be a dual lane by pass around a town centre on the outskirts of Sydney. The project is estimated to
improve journey time for commuters into Sydney and reduce congestion problems in the town. There are some concerns which have been raised I:
local inhabitants including the increased noise and pollution caused bythe new road, and the loss of a small, but ecologically important,
area of National Park as a result of one ofthe options. The town council and NSW State Government re quire an appraisal o the project
accounting fortime savings, loss of natural environment and otherfactors. You have been recommended to use a social discount rate of 3%
for both of the options considered.

Option 1

Initial Costs

The site of the new road will need to be purchased at a cost of $5

million, and the project will need to be planned at a cost of around $250,000. Both the purchase ofthe land and the planning agreement must
be in place before construction can begin (i.e. at yearo).

Construction is estimated to take three years. Initial construction costs

estimated by the contractor,which occur in year 1, include site clearance estimated at around $750,000, and initial ground works at $2.5m.
Other construction costs occur in all three years (year 1 , 2, and 3) and include building materials at $3.75 million, and plant rental at
$900,000. These costs hav e been fixed with the contractor and so remain the same for each year.

Wage costs are for 150 construction

workers at $40 per hour, and a site manager at $60 per hour. Estimated staffing times are 45 hours per week all year (47 weeks) forthe site
manager, and 40 hours per week all year forthe construction workers (47 weeks). Wages are expected to grow at an annual rate of 1%.
The

other major cost incurred in the dev elopment of the road is the loss of small National Park. This should be valued in the project BCA. To do
this you hav e been recommended to use the simple zonal trav el cost method, deriving average usage figures from Table 1 below. Note there is
no entry/admission cost for using the park, and that times and distances given in Table 1 relate to journeysto and from the park for each
zone.

Zone Average time (hrs) Average Distance (km) Average No. of /isits Lost (per year)

Ao.510 50,000

B1 40 30,000

C 2 100

13,000

Table 1:ZonaI Travel Cost Data

Use the zonal travel cost methodology as set out here:

I’:ttp:/Mww.cbabuilder.co.uk/Ouant4.htmI. The av erage hourly wage rate is $35, and marginal vehicle operating costs are $0.30 per

m.

Ongoing Costs

There is a significant maintenance cost associated with the new road estimated at $250000 per annum. This cost will

begin in year4 following the completion ofthe road and is expected to grow at an estimated 1.5% per year.

Benefits

The benefits of the new road include reduced congestion and sub sequent time-savings, as well as some estimated accident reduction.

Time savings perfyear are estimated as ollows:

-Priv ate cars and motorcycles-6500 hours

-Business cars – 3000 hours

-Light commercial vehicles

90 0 hours

-Buses – 500

-Trucks – 12000

Delay costs for each class ofvehicle are given in Table 2.

Vehicle Type Delay cost

I(,D.ollars/hour/vehicle)

riv ate cars and motorcycles 32

Business cars 78

Light commercial vehicles 49

Buses 185

Trucks 63

Source:

adapted from BITRE (2009) Table T6.1

Table 2: Delay Cost Data

These savings will begin in year 4 once the road is complete, and

continue until the end of the BCA appraisal period (year 28).

Estimated benefits in relation to accident reduction are asfollows: a

reduction in the current rate of fatalities on the road by 1 per year, a reduction in serious accidents by3 per year, a reduction in

accidents causing slight injury by 50 per year, and a reduction in damage only accidents of 150 per year. Costs associated with each type of
accident are given in Table 3 below. These reductions will all be made in the urban area around the town. The reductions should be included
from years 4 to 28.

$2.67 million per fatal accident

$266,000 per accident resulting in serious injury

$14,700 per accident

resulting in slight injury

$9,950 per damagje only accident

Source: BITRE (2 09)

Table 3: Cost per accidenttype

Option

Option 2 is differs from Option 1 in that it takes a different route and so avoidsthe loss of the National Park. This entails

extending the length ofthe road by an additional 10 kms, close to a residential are a.

The increased road length means an increase in

costs. Assume that land purchase, planning, site clearance, ground works, building materials and plant rental are all increased by 25% over
O:ption1 costs. Also assume that a further 20 workers will be required for construction, and that ongoing maintenance costs will increase to
00,000 per annum.

Increased road length also increasesthe probability of accidents occurring. Assume that the reduction in number of

accidents ofdifferent typesfor Option 2 are:

-0.5 for fatalities

-1 .5 for serious accidents

-30 for slight injury

-100 for

damage only

All other costs and benefits remain the same asfor Option 1.

Que stions

1.Using the data on costs and benefits provided

what is the NPV and BCR associated with Options 1 and 2 given a BCA period of twenty-eight years?

2.Which option should be chosen and

WIIQ/7

3. o value has been included to account forthe increased noise and air pollution which will affect inhabitants close to the lo cation

of the new road. It is estimated that the av erage house v alue will decrease from its current lev el of $300,000 to around $250,000 as a
result of the project. This will affect 150 houses close to the road in Option 1 and 500 houses in Option 2. How does this affect the
outcome for both options in terms of NPV and BCR?

4.EstabIish which v ariables have the biggest impact on the outcome of the analysis using

some simple sensitivity analysis.

5.Discuss the limitations ofthe analysis in terms of any possible impacts ofthe project that have not been included in the data you are provided with.

References:

Bureau of lnfrastructure,Transport and Regional Economics [BITRE],

2009, Road crash costs in Australia 2006, Report 118, Canberra, Nov ember
(http://www.bitre.gov.au/publications/2010/files/report_118.pdf).

Acknowledgments:

This is a modified (and Australianised) version of a problem taken from the CBA Builder website,http://www.cbabuiIder.co.uk.

Notes:

(i) Submit this assignment as an Excel workbook

(spreadsheet) via Moo dle. Insert yourtext answers into a text box on one ofthe sheets of this file.

(ii) But be sure to include enough explanation to show how you hav e calculated your net pre sentv alues and estimated the cash flows (i.e. do not putto many calculations in
one cell, tryto make your spreadsheet as clear and easy to follow as possible).

(iii) Incorporate this cost by calculating the total

change in assetv alue caused bythe noise pollution for all 150 houses (for Option 1,500 for Option 2) and then apportion this equally ov er
all years in which the pollution occurs. Note that this is a somewhat simplistic way of including the costs of noise pollution.

(‘VI Unless otherwise noted assume that benefits and costs remain constant over the period cov ered by the analysis.

Submission method:

This assignment should be submitted electronically via Moo dle (as an Excel file).