Problem:
You are required to perform a project appraisal of 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 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 a small, but ecologically important, area of National Park which the road will cut through. 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%.
Initial Costs
The site of the new road will need to be purchased at a cost 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 place before construction can begin (i.e. at year 0). Construction is estimated to take three years. Initial construction costs estimated by the 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 development of the road is the loss of small National Park. This should be valued in the project BCA. To do this you have been recommended to use the simple zonal travel…