The government of country X is considering a highway project which would connect the two provinces of this country. It asked your company to provide a cost-benefit analysis of the proposal.

If the project is approved, the construction will begin in January 2021 (time 0 in your analysis). The life of this highway is 20 years. All the monetary values given below are in real values in January 2021 prices.

The costs for doing research about the feasibility of the project were $1 million in January 2019 and $2 million in January 2020.

The capital costs for building the highway are $20 mil in January 2021 and $30 mil in January 2022. The maintenance cost is $1 million per year. Working capital costs of $5 million occur in January 2021. The highway would be put into operation from January 2023. The toll collection will be $5 million in January 2023 and would be grown at 5 % per year until January 2041. The highway will be sold for $5 million at the end of the project life.

To do this project, 10 trucks would be bought in Jan 2021. The purchasing prices for these 10 trucks is $1 mil in total and the registration fee for using these trucks is $100000. The costs of these trucks will be depreciated at $0.055 million per year.

The project investor would take bank loans to get money to do the project and they have to pay interest of $30000 per year.

The nominal discount rate is 10% and the inflation rate is 5%

Required:

(a)      Which cost and benefit items are irrelevant (i.e., not included) in CBA? Explain why. (15 marks)

(b)      Present your NPV table which shows all working benefit and cost items in CBA. (15 marks)

(c)       State whether you would recommend the government allow the highway to be constructed. (10 marks)

Answer rating: 100% (QA)

a Cost incurred on project feasibility report in 2019 1 mil and 2020 2 mil are not considered while ... View the full answer