Question

National Highways Authority (NHA) is considering a public-private partnership with Friends construction as main contractor using a DBOMF contract for a new 50-mile motorway on the outskirts of Baluchistan Province. The design includes seven 10-mile-long commercial/retail corridors on both sides of the road. Motorway construction is expected to require 6 years at an average cost of $4 million per mile. The discount rate is 11% per year, and the study period is 30 years. Initial investment is $200 million distributed over 5 years; $50 million now and in year 6 and remaining amount equally in rest of the years. Annual operating cost is $10 million per year, plus an additional $5 million every six years. Annual revenues Include tolls and retail/commercial growth; start at $5 million in first year, increasing by a constant $2 million annually through year 10, and then increasing by a constant $3 million per year through year 20 and remaining constant thereafter. Disbenefits include loss of income to people in surrounding areas; start at $15 million in year 1, decrease by $2 million per year through year 21, and remain at zero thereafter.

Required: Evaluate the economics of the proposal using (a) the modified B/C analysis from the NHA’s perspective and (b) the profitability index from the Friends construction viewpoint in which disbenefits are included and not included.

Answer 1

Given points-

Road lenght- 50 mile motorway with 10 miles corridor.

Time required- 6 years

Cost- 4 million per mile

total cost-4*6=24 million.

discount- 11% per year

4000000*11/100=440000

after 6 years=total discount-2,640,000

Amount after discount=21,360,000

Study time= 30 years

200 millions in 5 years

50 million now and 150 in next 5 years.

operationg cost= 10 miilion per year

additional coast= 5 million per year

income in first year 5 which keeps increasing by 2 million for next 10 years and after that increase by 3 million for next 20 years.

so at the end of 30th year incomes become is 1341 million

Initially loss was 15 million for 1st year which beomes null at end of the 30th years.

Total loss so at the end of 30th year incomes become is 58 million

BCA= Toltal cost/income.

lets clculate for present year

4million+10million+ 5million=19 million

income 5 million

19/5= 3.8 million

Profitability Index = Present Value of Future Cash Flows ÷ Initial Investment in the Project. ... If the profitability index of a project is 1.2, for example, investors would expect a return of $1.20 for every $1.00 spent on funding the project.

200million/50 million= 10million.