1. Evaluate the viability of the City Transport project using the Net Present Value Technique.

2. Recommend four strategies to the management of Transit Co limited on how to protect the company’s interest in the light of the petition by Local Transport Owners and Drivers’ Union.

Colonial Town Planning designs had well specified layout for major cities and towns. However, the attainment of independence for many of these colonised states has seen weak enforcement of town and country planning bye-laws. This has led to the development of many shantytowns, taking away the beauty, coordination of human settlement and traffic management a situation that contributes to wasting working hours in traffic when workers and commuters access the central business district to work or trade. The government of Topaland is committed to building a modern capital city, with an organised transportation network in the capital, Zigman City. As part of this move, Zigman City has been zoned into four major parts, the Western, Eastern, Northern and Southern zones linked by the original major highways lanes designed by the colonial masters.

The Ministry of Roads and Transport has invited bids from companies to be considered for the sole right to offer transportation service on each of the Zones. Green Company Limited, manufacturer of fertilizer and farm implements, has incorporated Transit Co Limited a wholly owned subsidiary to provide transport services. Transit Co limited is considering bidding for the Western Zone. Local transport owners and drivers’ unions have petitioned the Ministry to be permitted to ply portions of these Zones. The concern of the bidders is that if this request is approved, these drivers would negatively affect the operations of the sole right owners in providing transportation service in these Zones. Transit Co Ltd has paid THC 500,000 for a feasibility study on this transport project. Based on the feasibility report, Transit Co intends to purchase 80 Scania buses for this project. Of this number, 65 buses would be deployed each day with the remaining 15 serving as a buffer in case of repairs and routine maintenance to be carried out on the buses or for rental services.

The total cost of these buses is estimated to be THC 40,200,000, the cost of office premises is given as THC 1,265,000, and environmental impact assessment is estimated to cost THC 85,000. All of these will be paid at the start. Working capital which is estimated to be 15 percent of anticipated sales each year must be available at the beginning of each year. This working capital would be recouped at the end of the project. Total number of passengers to be transported is estimated as,

Year	1	2	3	4	5
Passengers	3,800,000	4,180,000	4,389,000	3,950,000	3,357,585

Transport fare in current terms is given as THC 7 per passenger. It is projected that transport fares would increase by 10 percent in years one through three. For years four and five, the increase would be 5 percent each year. Variable cost per each passenger is expected to be THC 2 in the first year of operation increasing by 4 percent per year thereafter. Fixed cost including annual repairs and maintenance of the coaches is projected to be THC 5,200,000 in current terms and will increase by 7.5 percent each year. Transit Co plans to sell advertising space on and in the coaches. This is expected to rake in THC 1,500,000 in year one and two, and THC 2,500,000 for the rest of the years. The current annual corporation tax rate is 25 percent per annum payable in the year the liability arises. Tax allowable depreciation is available on a straight-line basis on the cost of the buses. It is estimated that a salvage value of 10 percent would be available at the end of the project. Written down allowance is available at 20 percent in arrears. The risk-adjusted WACC for the city transport project is given as 23 percent.

Answer rating: 100% (QA)

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