Scenario:

You are required to perform a project appraisal of two optionsfor 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 by local inhabitants including the increased noise and
pollution caused by the new road, and the loss of a small, but ecologically important, area of National Park as a result of one of the
options. The town council and NSW State Government require an appraisal of the project accounting for time savings, loss of natural
gnv ironment and other factors. You have been recommended to use a social discount rate of 3% for both of the options considered.

ption 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 Sf) around $250 ,000. Both the purchase of the land and the planning agreement must be in place before construction can begin (i.e. at Year

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) for the site manager, and 40 hours per week all year for the
construction workers (47 weeks). Wages are expected to grow at an annual rate of 1%.

The other major cost Incurred in the ev elopment of

the road isthe loss of small National Park. This should be valued in the project BCA. To do this you have been recommended to use the
simple zonal travel cost method, deriving av erage usage figures from Table 1 below. Note there is no entryladmission 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 Avera etime (hrs)l Average

Distance (km) Average o. of Visits Lost (per year)

A 0.5 10 50,000

B 1 40 30,000

C 2 100 13,000

lL’Jable 1: Zonal Travel Cost Data

se

the zonal trav el cost methodology as set out here: http:llwww.cbabuiIder.co.uk/Quant4.htmI. The average hourly wage rate is $35, and
marginal v ehicle operating costs are $0.30 per km.

Ongoing Costs

There is a significant maintenance cost associated with the new road

estimated at $250,000 per annum. This cost will begin in year 4 following the completion of the road and is expected to grow at an estimated
1.5%tper year.

Bene its

The benefits of the new road include reduced congestion and subsequent time-savings, as well as some estimated

accident reduction.

Time savings per year are estimated asfollows:

Priv ate cars and motorcycles-6500 hours

Business cars – 3000

hours

Light commercial vehicles – 9000 hours

Buses – 500

Trucks – 12000

gelay costs for each class of vehicle are given in Table

Vehicle Type Delay cost (Dollars/hourfv ehicle)

Priv ate cars and motorcyc es 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 by 3 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 damage only accident

Source: BITRE (2009)

Table 3: Cost per accident

type

Omwn2

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

entails extending the length of the road by an additional 10 kms, close to a residential area.

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 Option 1 costs. Also assume that a further 20 workers will be required for construction, and that ongoing maintenance costs WIII
increase to $300,000 per annum.

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

number of accidents of different 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.

Questions

Usir’ig the data on costs and benefits provided what is

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

Which option should be chosen and why?

Novame

has been included to account for the increased noise and air pollution which will affect inhabitants close to the location of the new road.
It is estimated that the average house v alue will decrease from its current Iev 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?

Estalblish which v ariables have the biggest impact on the outcome of the analysis using some simple sensitivity

ana SIS.

Discuss the limitations of the analysis in terms of any possible impacts of the 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:llwww.bitre.gov.aulpub icationsl201oIfileslreport_118.pdf).

Acknowledgments:

This is a modified

fintd Australianised) v ersion of a problem taken from the CBA Builder website, http:llwww.cbabuiIder.co.uk.

o es:

(i) Submit this

assignment as an Excel workbook (spreadsheet) via Moodle. Insert your text answers into a text box on one of the sheets of this file.

ll

But be sure to include enough explanation to show how you have calculated your net present values and estimated the cash flows (i.e. do not
put to many calculations in one cell, try to make your spreadsheet as clear and easy to follow as possible).

(iii) Incorporate this cost by

calculating the total change in asset value caused b the noise pollution for all 150 houses (for Option 1,500 for Option 2) and then
apportiorltlthis equally ov er all years in which the pollution occurs. Note that this is a somew at simplistic way of including the costs of
noise po ution.

(iv) lUnIess otherwise noted assume that benefits and costs remain constant over the period covered by the

ana SIS.

Submission method:

This assignment should be submitted electronically via Moodle (as an Excel file).DetaiIs of how to submit

your assignments in Moodle can be found at:http:IlmoodIe.une.edu.aulmodIbook/view.php?id=79705.