This document discusses financial analysis methods for urban transport projects, including net present value (NPV), cost-benefit analysis (CBA), and internal rate of return (IRR). It provides examples of how to calculate project costs, benefits, NPV, IRR, and determine if a project is economically viable. Specifically, it shows an example analysis of a proposed 21km road project, calculating project costs, travel time and vehicle operating cost savings over 12 years, and determining the project has a benefit-cost ratio above 1 and IRR of 27.6%, indicating it is economically viable.

1. Urban Transport
Financial Analysis
Riza Atiq bin O.K. Rahmat

2. 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

3. Project Purposes
• Capacity for service quality
• Capacity for quantity, growth
• Access to intermodal facilities, ports
• Access to land use
• Investments to reduce operations costs

4. 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.

5. NPV
Mn
NPV =
(1 + i ) n
where i = Discount rate
Mn= Cash Flow
n = the n th period

6. 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.

7. 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
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/#ixzz226S
viIOO

8. irr
N
Bn − Cn
∑ (1 + irr ) n = 0
n =1
Bn = Benefit at the end of n period.
Cn = Cost at the end of n period
irr = Internal Rate of Return

9. 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

10. Vehicle Operating Cost
• Out of pocket cost
o Fuel
o Lubricant
o Tyre
o Maintenance

11. 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

12. Example
A 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.

13. Solution
Construction 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

14. Analysis
Year Cost Benefit NPV cost NPV benefit Cost Stream
385,000,000.00
0 385,000,000.00 -385,000,000.00
385,000,000.00
1 356,481,481.48 -385,000,000.00
2,500,000.00 208,047,262.50
2 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%
The project is viable because B/C ratio > 1 and irr=27.6%