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Benefit cost analysis

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You are
required to perform a project appraisal of two options for a proposed new road. The road will be a dual lane by pass around a town centre
on the outskirts of Sydney. The project is estimated to improve journey time for commuters into Sydney and reduce congestion problems in thu
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 a small, but ecologically important, area of National Parkaas a result of one of the options. The town council and NSW
State Government 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 3%for both of the options considered.
Option 1
Initial Costs The site of the new road will need to be purchased at acost of $5 million, and the project will need to be planned at a cost of around $250 ,000. Both the
purchase of the land and the planning agreement must be in p ace before construction can begin (i.e. at year 0).
Construction is estimated to take three years. Initial construction costs estimated bythe contractor,which occur in year 1, include site clearance
estimated at around $750,000, and initial ground works at $2.5m. Other construction costs occur in all three years (year 1 ,2, and 3) and
include building materials at $3.75 million, and plant rental at $900,000. These costs have been fixed with the contractor and so remain the
same for each year.
Wage costs are for 150 construction workers at $40 per hour, and a site manager at $60 per hour. Estimated staffing
times are 45 hours per week all year (47 weeks) for the site manager, and 40 hours per week all year for the construction workers (47
weeks). Wages are expected to grow at an annual rate of 1%.
The other major cost incurred in the dev elopment of the road is the loss of a
small National Park. This should be valued in the project BCA. To do this you hav e been recommended to use the simple zonal travel cost
method, deriving average usage figuresfrom Table 1 below. Note there is no entryladmission cost for using the park, and that times and
distances given in Table 1 relate to journeys to and from the park for each zone.
Zone Average time (hrs) Average Distance (km) Average
No. of Visits Lost (per year)
A 0.5 10 50,000
B 1 40 30,000
C 2 100 13,000
Table 1: Zonal Travel Cost Data
Use the zonal travel cost
methodology as set out here: http:llwww.cbabuilder.co.uklQuant4.htmI. The average hourly wage rate is $35, and marginal vehicle operating
costs are $0.30 per km.
Ongoing Costs
There is a significant maintenance cost associated with the new road estimated at $250000 per
annum. This cost will begin in year 4 following the completion of the road and is expected to grow at an estimated 1.5% per
The benefits of the new road include reduced congestion and subsequent time-savings, as well as some estimated accident
Time savings per year are estimated asfollows:
Priv ate cars and motorcycles-6500 hours
Business cars – 3000
Light commercial vehicles – 9000 hours
Buses – 500
Trucks – 12000
Delay costs for each class of vehicle are given in Table
Vehicle Type Delay cost (Dollars/hourfv ehicle)
Priv ate cars and motorcycles 32
Business cars 78
Light commercial
vehicles 49
Buses 185
Trucks 63
Source: adapted from BITRE (2009) Table T6.1
Table 2: Delay Cost Data
These savings will begin in
year 4 once the road is complete, and continue until the end of the BCA appraisal period (year 28).
Estimated benefits in relation to
accident reduction are asfollows: a reduction in the current rate of fatalities on the road by 1 per year, a reduction in serious accidents
by 3 per year, a reduction in accidents causing slight injury by 50 per year, and a reduction in damage only accidents of 150 per year.
Costs associated with each type of accident are giv en in Table 3 below. These reductions will all be made in the urban area around the town.
The reductions should be inc uded from years 4 to 28.
$2.67 million per fatal accident
$266,000 per accident resulting in serious
$14,700 per accident resulting in slight injury
$9,950 per damage only accident
Source: BITRE (2009)
Table 3: Cost per accident
Option 2 is differs from Option 1 in that it takes a different route and so av oidsthe loss of the National Park. This
entails extending the length of the road by an additional 10 kms, close to a residential area.
The increased road length means an
increase in costs. Assume that land purchase, planning, site clearance, ground works, building materials and plant rental are all increased
by 25% ov er Option 1 costs. Also assume that a further 20 workers will be required for construction, and that ongoing maintenance costs will
increase to $300,000 per annum.
Increased road length also increasesthe probability of accidents occurring. Assume that the reduction in
number of accidents of different types for Option 2 are:
0.5 for fatalities
1.5 for serious accidents
30 for slight injury
100 for
damage only
All other costs and benefits remain the same asfor Option 1.
Using the data on costs and benefits provided
what is the NPVand BCR associated with Options 1 and 2 given a BCA period of twenty-eight years?
Which option should be chosen and
No v alue has been included to accountfor the increased noise and air pollution which will affect inhabitants close to the location of
the new road. It is estimated that the average house value will decrease from its current level of $300,000 to around $250,000 as a result
of the project. This will affect 150 houses close to the road in Option 1 and 500 houses in Option 2. How doesthis affect the outcome for
both options in terms of NPV and BCR?
Establish which variables have the biggest impact on the outcome of the analysis using some simple
sensitivity analysis.
Discuss the limitations of the analysis in terms of any possible impacts of the project that have not been included
in the data you are provided with.
Bureau of lnfrastructure,Transport and Regional Economics [BITRE],2009, Road crash
costs in Australia 2006, Report 118, Canberra, November
This is a modified (and Australianised) version of a
a problem taken from the CBA Builder website, http:lIwww.cbabuilder.co.uk.
(i) Submit this assignment as an Excel workbook
(spreadsheet) via Moodle. Insert your text answers into a text box on one of the sheets of this file.
(ii) But be sure to include enough
explanation to show how you hav e calculated your net present v alues andaestimated the cash flows (i.e. do not put to many calculations in
one cell, try to make your spreadsheet as clear and easy to follow as possible).
(iii) Incorporate this cost by calculating the total
change in asset v alue caused by the noise pollution for all 150 houses (for Option 1,500 for Option 2) and then apportion this equally ov er
all years in which the pollution occurs. Note that this is a somewhat simplistic way of including the costs of noise pollution.
Unless otherwise noted assume that benefits and costs remain constant over the period cov ered by the analysis.

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