EFB106 COST AND BENEFIT ANALYSIS FOR PROJECT APPRAISAL

Assessment Item 1: Sensitivity Analysis

Due Date: 5 PM, Saturday 10 September 2016

Form of submission: ONLINE

Online resource: http://www.cbabuilder.co.uk/

CBA Builder Excel Tool: http://www.cbabuilder.co.uk/CBABuilder.html

Please choose CBA Simple version

Case description:

The below case is drawn on the Wheatley D (2010) CBA Builder Advanced Worksheet 1: New Trunk Road. The UC has made several changes to the values of several parameters and questions. Copy right of this case study however belongs to Wheatley D. (2010).

You are required to perform a project appraisal of a proposed new trunk road. The road will be a dual lane bypass around a town centre in Cheshire. The project is estimated to improve journey time through the county 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 an area of parkland which the road will cut through. The county council and UK Government’s Department for Transport (DfT) require an appraisal of the project accounting for time?savings, loss of natural environment and other factors. You have been recommended to use a social discount rate of 0.044.
The site of the new trunk road will need to be purchased at a cost of $1.3m (using a compulsory purchase order), and the project will need to be planned at a cost of around 57200. Both the purchase of the land and the planning agreement must be in place before construction can begin. Initial costs estimated by the contractor, which occur in Year 0, include site clearance estimated at around 220000, and initial ground works at 1210000. Construction costs occur in Year 1, Year 2, and Year 3 and include building materials at 2035000, and plant rental at 660000. These costs have been fixed with the contractor and so remain the same for each year. Wage cost are for 220 construction workers at 19 per hour, and a site manager at 34 per hour. Estimated staffing times are 34 hours per week all year (47 weeks) for the site manager, and 27 hours per week all year for the construction workers (47 weeks). The staffing times remain the same in Year 1, Year 2 and Year 3 and wages grow at the rate equivalent to 0.012.

The development of the road causes loss to different parts of the natural parkland. The local economists have agreed that the loss per year for each zones are in the below table.

There is a significant maintenance cost associated with the new trunk road estimated at 101200 per annum. This cost will begin in Year 4 following the completion of the road. The growth rate for this cost is estimated at 0.03.

It is estimated that the average house value will decrease from its current level of $250,000 to around 209000 as a result of the project. This will affect 110 houses close to the road.

The benefits of the new trunk road including reduced congestion and subsequent time?savings, as well as some estimated accident reduction. The benefits due to time savings are estimated to be around 165000 (work?time savings by cars), 143000 (commuting by cars) and 2200000 (work by large vehicles). These savings will begin in the beginning of Year 4 and continue until the end of the CBA appraisal period (Year 20) with an annual growth rate of 3% from Year 4 to Year 10 and 0.5% from Year 11 to Year 20.

Estimated benefits in relation to accident reduction are due to estimated reduction in the current rate of fatalities on the road, and reduction in serious and slight accidents as well as damage made to vehicles. The reductions should be included from Year 4 to Year 20. Estimated values of these benefits are around 922500 per year with the lower bound of 795000 and upper bound of 1050000.

In addition to this, it is expected that the new trunk road will reduce the ongoing cost of maintenance on the existing road, producing annual savings of $50,000. This saving will begin in the beginning of Year 4 and continue until the end of the CBA appraisal period (Year 20) with an annual growth rate of 3%.

Questions

1. Using the data on costs and benefits provided, submit an excel spreadsheet using CBA Builder Simple (maximum 5 marks – AOL KS1.2).

2. Using the information given in a worksheet “Sensitivity Analysis” to answer following questions
   1. Discuss the meaning of the calculated value a break-even discount rate (maximum 2 marks – AOL KS1.1)
   2. Discuss the purpose of conducting this sensitivity analysis (maximum 3 marks – AOL KS1.1).

3. Construct a table listing the major present values of cost and benefits (maximum 2 marks- AOL KS1.2). Use this table and answer two following questions:
   1. What are cost item (one item) and benefit item (one item) do you think will have the most impact on the net present value of the project? Justify your answers. (maximum 4 marks – AOL KS1.1)
   2. Take the view of a more pessimistic person, what variable(s) in the cost and benefit sides would you like to vary its value (i.e. to change or to modify with various values) in order to assess the sensitivity of the NPV? Provide arguments for your answer. (maximum 4 marks – AOL KS1.1)

4. Remove those items that do not have market prices in the cost and benefit sides, then construct a CBA Builder. Using the newly constructed CBA Builder, answer the following questions
   1. Fill in answers to the below table (maximum 3 marks – AOL KS1.2)

1. Comment on the implication and significance of including all non-market costs and benefits on the NPV, break-event IRR and IRR (maximum 2 marks – AOL KS1.1)

Online submission requirement

1. For Question 1 & 4: submit TWO DIFFERENT Excel spreadsheets. Please name your files as xlsx and Nxxx_CBA_Q4.xlsx where xxx is your student number.
2. For Questions 2 & 3: please provide a short Word document or pdf, highlighting your answers.

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