Urban Transport Financial Analysis Riza Atiq bin O.K. Rahmat
Financial Analysis• Spending People’s Money to carry out transport projects• Source of fund o Federal government grants o Bond o 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 (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.
NPV Mn NPV = (1 + i ) nwhere i = Discount rate Mn= 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/#axzz226PW7TFw• 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 projects 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/#ixzz226S viIOO
irrN Bn − Cn∑ (1 + irr ) n = 0n =1Bn = Benefit at the end of n period.Cn = Cost at the end of n periodirr = Internal Rate of Return
Value 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). 1 P= αCost + βTime ) 1 + De• Value of time = β/α
Vehicle Operating Cost• Out of pocket cost o Fuel o Lubricant o Tyre o Maintenance
Vehicle Operating Cost (RM/km) Motor- car Van lorry bus cycle 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 Total 0.072 0.425 0.530 1.755 1.795
ExampleA state government has a plant to construct a 21 km road. The project costis 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 costand travel time which are estimated to be 1,212,000 vehicle-km/day and27,750 men-hr/day. Average travel time value is RM 11.15/hr and the vehicleoperating cost is 21.5 cents per kilometer.Both reduction are forecasted to be increasing steadily at the rate of 9% perannum. Road maintenance cost is estimated to be RM 2,500,000 per annum and willkeep on increasing at the rate of 10.5% per annum. The project will be finance by the federal government and the pay backperiod is 12 years. Discount rate is 8%.Ascertain whether the project is economically viable.
SolutionConstruction 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 * RM11.15= RM 309,412.50 per dayTotal reduction per annum= ( RM 260,580 + RM 309,412.50 ) x 365= RM 208,047,262.50