Question

Question # 01: 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. Note: You have to show all calculations including workings in your answer sheet.

Answer 1

cost of construction: $4*(7*10+50) = $4*120=$480 million

Years	cost of construction	operating cost	total revenue	loss of income	net cash flow	discounting rate	net present value
1	50	10	5	15	-70	0.901	-63.07
2	37.5	10	7	13	-53.5	0.812	-43.442
3	37.5	10	9	11	-49.5	0.731	-36.1845
4	37.5	10	11	9	-45.5	0.659	-29.9845
5	37.5	10	13	7	-41.5	0.593	-24.6095
6	11.2	15	15	5	-16.2	0.535	-8.667
7	11.2	10	17	3	-7.2	0.482	-3.4704
8	11.2	10	19	1	-3.2	0.434	-1.3888
9	11.2	10	21	0	-0.2	0.391	-0.0782
10	11.2	10	23	0	1.8	0.352	0.6336
11	11.2	10	26	0	4.8	0.317	1.5216
12	11.2	15	29	0	2.8	0.286	0.8008
13	11.2	10	32	0	10.8	0.258	2.7864
14	11.2	10	35	0	13.8	0.232	3.2016
15	11.2	10	38	0	16.8	0.209	3.5112
16	11.2	10	41	0	19.8	0.188	3.7224
17	11.2	10	44	0	22.8	0.17	3.876
18	11.2	15	47	0	20.8	0.153	3.1824
19	11.2	10	50	0	28.8	0.138	3.9744
20	11.2	10	53	0	31.8	0.124	3.9432
21	11.2	10	53	0	31.8	0.1117	3.55206
22	11.2	10	53	0	31.8	0.1007	3.20226
23	11.2	10	53	0	31.8	0.0907	2.88426
24	11.2	15	53	0	26.8	0.0817	2.18956
25	11.2	10	53	0	31.8	0.0736	2.34048
26	11.2	10	53	0	31.8	0.0663	2.10834
27	11.2	10	53	0	31.8	0.0597	1.89846
28	11.2	10	53	0	31.8	0.0538	1.71084
29	11.2	10	53	0	31.8	0.0484	1.53912
30	11.2	15	53	0	26.8	0.0436	1.16848
	480						-157.14744

according to the working done in the above table, this project is not beneficial from the point of view of economics as the present value is in minus

so can't calculate the benefit-cost ratio and profitability index also.