ECON7740 Cost Benefit
Analysis & Project Evaluation
Semester 2, 2025
Individual Case Study: Highway Project
ALL SECTIONS DUE, 3pm 10th November 2025. Submitted online.
Instructions:
This assignment will consist of a CBA task worth 40% (spreadsheet and report) of your final grade.
The assignment must be submitted electronically through the Online Submission links in the Assessment section of the Course Blackboard site.
• Part 1 MUST be submitted as an Excel file (.xls or .xlsx)
• Part 2 MUST be submitted as a Word file (.doc or docx)
Further details to be announced on Blackboard.
Remember that each value should be entered into the spreadsheet only once.
Marked out of 60 points (weighted to 40% of your final grade).
1. Background:
The Island of Tong Government (ITG) is considering an investment of aid funding to develop a 233-kilometer, four-lane, high-speed, limited-access highway network. This network will connect East Town with West Town and North Town, significantly enhancing regional connectivity.
The project will be executed in two stages:
• Stage 1 (2026一2029): Construction of the 85-kilometer stretch between East Town and Central Town.
• Stage 2 (2029一2031): Completion of two additional segments—85 kilometers westward from Central Town to West Town, and 63 kilometers northward from Central Town to North Town.
An overview of the proposed routes is illustrated in Figure 1.
Figure 1: Map Showing Route of Planned Highway
2. Project Delivery Model and Operational Framework:
This project is proposed to be delivered through a Public-Private Partnership (PPP), under which a private contractor (the “concessionaire”) will undertake the project using a Build- Operate-Transfer (BOT) scheme. Under this arrangement, the concessionaire will be responsible for the design, construction, operation, and maintenance of the highway.
The highway will be operated as a toll road, enabling the concessionaire to recover its share of the capital investment, as well as operating and maintenance costs. The concessionaire will manage the highway for a 15-year period, commencing in 2032, upon the completion of Stage 2, and concluding in 2046. At the end of this term, the highway will be transferred to ITG at no cost.
Following the transfer, ITG will assume full responsibility for the highway’s operations and maintenance until the end of its projected lifecycle in 2071.
3. Cost-Benefit Analysis Requirements:
You are required to conduct a comprehensive cost-benefit analysis of the project from the perspectives of both ITG and the concessionaire. All calculations in your CBA must be:
• Expressed in millions of Australian dollars (A$)
• Rounded to two decimal places
• Presented in constant 2026 prices
Please note that all values referenced in this project summary are based on 2026 price levels, using the following assumed exchange rate of ITG dollars to Australian dollars:
ITG$80 = A$1.
4. Investment Costs
Table 1 presents a detailed breakdown of investment costs by year, highlighting the distribution between the private and public sectors and the composition of construction inputs.
Table 1: Composition of Capital Costs
(All values in ITG$ millions)
4.1 Highway Construction
Land acquisition occurs at the beginning of each construction phase and is included in ITG’s capital costs. Specifically:
• In 2026, ITG$3,200 million (of ITG$4,000 million) is allocated to land.
• In 2029, ITG$6,400 million (of ITG$8,000 million) is allocated to land.
The opportunity cost of the land is estimated at 50% of the purchase price paid to previous owners.
Labour Composition:
• Local labour: 50% unskilled, 50% skilled/managerial.
• Foreign labour: 100% skilled/managerial.
Shadow Pricing:
• Unskilled labour: 20% of wage.
• Skilled labour (local and foreign): 100% of wage.
Material and Equipment Costs:
• Local inputs include a 10% sales tax paid to ITG.
• Imported inputs include a 5% import duty.
• No sales tax is applied to imports.
4.2 Toll System Infrastructure
The toll system will include six toll plazas, constructed as new road sections are completed. Each plaza has a capital cost of ITG$150 million (2026 prices).
Installation Schedule:
• 2029: 2 plazas
• 2030: 2 plazas
• 2031: 2 plazas Cost Composition:
• 40% imported materials (includes 5% import duty)
• 40% local materials (includes 10% sales tax)
• 10% skilled labour
• 10% unskilled labour
5. Operating and Maintenance Costs and Salvage Value
5.1 Highway Maintenance
Highway maintenance costs (excluding tolling facilities) are projected at ITG$300 million per year, starting in 2029. These costs should follow the same input composition as the capital construction costs incurred between 2026 and 2031, as detailed in Table 1.
5.2 Toll System Maintenance
The toll system will require ongoing maintenance and periodic rehabilitation beginning in 2032. These costs are estimated at 5% of the total initial capital cost of the toll
infrastructure. For efficiency (social) pricing purposes, assume the same input composition as the original capital costs of the toll plazas.
5.3 Salvage Value
The salvage value of both the highway and toll infrastructure is estimated at 50% of their initial capital cost. For the efficiency (social) analysis, assume that these salvage values
reflect market prices.
• If ITG discontinues tolling at the end of the 15-year concession (i.e., in 2046), the salvage value of the toll plazas only should be accounted for at that time.
• If tolling continues, the salvage values of both the highway and toll plazas should be recognized at the end of the project life in 2071.
All salvage value benefits will accrue to ITG.
6. Benefits of the Highway Project
The following categories of benefits should be considered in the project appraisal:
1. Reduced vehicle operating costs due to improved road surface quality
2. Time savings for passengers and drivers
3. Lower maintenance costs on existing roads due to reduced traffic volumes
4. Reduced accident costs from improved road safety
5. Lower pollution levels due to more efficient vehicle usage
6. Toll revenues received by the concessionaire and ITG
Table 2 presents the projected traffic volumes on the new highway network. These figures include vehicles traveling in both directions across the existing and new roads.
Table 2 Forecast of Total Road Usage from 2030
With tolls in place, it is estimated that 60% of traffic between towns will shift to the highway, while 40% will continue using existing roads. Starting in 2031, traffic volumes are expected to grow by 4% annually. In 2030 and 2031, highway usage will be 36% of the total forecast volume. From 2032, when Stage 2 opens, the highway is expected to operate at 100% of its forecast traffic volume.
6.1 Reduced Vehicle Operating Costs (VOCs)
Under the ‘without-project’ scenario, the existing road network remains unchanged. It is assumed that total vehicle and passenger kilometres travelled are the same with or without the highway.
• Traffic Composition: 60% passenger vehicles; 40% trucks
• VOC Savings (2026 prices):
o Passenger vehicles: ITG$3.50/km
o Trucks: ITG$20/km
These savings should be treated as external benefits in both market and investor analyses, with efficiency prices equal to market prices.
6.2 Value of Time Savings
• Passenger Vehicle Occupancy: 16 passengers (including driver)
• Truck Occupancy: 1.5 passengers (including driver)
• Purpose of Travel (passenger vehicles only):
o 15% work
o 52% commuting
o 33% leisure
• Purpose of Travel (trucks):
o 100% work
• Opportunity Cost of Time (per person-km, 2026 prices):
o Work: ITG$6
o Commuting: ITG$5
o Leisure: ITG$4
• Time Savings:
o Passenger vehicles: 70% reduction
o Trucks: 45% reduction
All time savings should be treated as external, non-financial benefits, excluded from market and investor analyses, and priced using appropriate shadow prices in efficiency (social) and referent group (disaggregated) analyses.
6.3 Reduced Maintenance Costs on Existing Roads
With 60% of traffic shifting to the highway, existing roads will experience reduced wear and tear.
• Without Highway: Annual maintenance costs = ITG$4,000 million (2026 prices)
o 95% capital works
o 5% operating expenses
• Expected Reductions:
o Capital works: 10%
o Operating expenses: 20%
These savings should be treated as benefits to ITG in both investor and efficiency (social) analyses, using the same price composition as highway construction and operations.
6.4 Reduced Accident Costs
• Annual Accident Costs (2026): ITG$4,000 million
• Accidents on Highway Corridor: 20% of total
• Expected Reduction: 40% of corridor-related accidents
o Equivalent to 8% of total annual accident costs
These benefits should be treated as external in market and investor analyses, with shadow prices equal to market prices.
6.5 Reduced Pollution Costs
Main pollutants: carbon dioxide (CO2 ), carbon monoxide (CO), hydrocarbons (HC), nitrous oxide (NO), sulphur oxide (SO) and particulate matter (PM). Based on international
benchmarks and fleet composition:
• Pollution Cost Savings (efficiency prices):
o Passenger vehicles: ITG$0.20/km
o Trucks: ITG$0.40/km
These benefits are external and should be attributed to residents in the efficiency (social) and referent group (disaggregated) analyses.
6.6 Toll Revenues
• Toll Rates (2026 prices, adjusted for inflation):
o Passenger vehicles: ITG$10/km
o Trucks: ITG$20/km
• Revenue Allocation: All toll proceeds retained by the concessionaire until the end of the concession in 2046
• Tax: No sales tax applied to tolls
Table 3 below summarises the highway project benefits
Table 3: Summary of benefits
7. Tax and Financing Arrangements
The concessionaire is subject to a 25% corporate tax on its earnings. While interest payments on loans are tax-deductible, depreciation allowances are not permitted as deductions against taxable income.
7.1 Financing Structure
• Concessionaire:
• Will finance its share of the initial capital cost with A$200 million in loans from international banks.
• Loans are drawn in 2029, with repayment over 15 years at a 3% real interest rate.
• The remaining investment is funded through equity contributions from its parent company in Spain.
• ITG (Infrastructure Transport Group):
• Will borrow A$600 million domestically in 2029, repayable over 40 years at a 5% real interest rate.
• The balance of ITG’s expenditure will be financed from its own funds.
8. Termination of the Concession
At the end of the concession period in 2046, ownership and responsibility for the highway and its maintenance will transfer fully to ITG, with no compensation paid to the concessionaire.
8.1 Post-Concession Operation
• The highway is expected to remain in operation for an additional 25 years, until 2071.
• The salvage value of the highway at that time is estimated at 50% of its initial capital cost.
8.2 Toll System Decision
A decision must be made regarding the continuation of the toll system from 2047 onwards:
• If tolls are removed, traffic volume on the highway is projected to increase by 30%, as more vehicles shift from the existing road network.
• This increase will affect benefit calculations:
• All benefits, except for reduced maintenance costs on existing roads, will increase proportionately with traffic volume (i.e., by 30%).
• This includes benefits such as vehicle operating cost savings, time savings, accident cost reductions, and pollution savings.
8.3 Toll Infrastructure Salvage Value
• Toll collection infrastructure has a salvage value of 50% of its initial cost.
• If tolls are discontinued in 2046, the infrastructure will be scrapped at that time.
• If tolls continue, the infrastructure will be scrapped in 2071.
• In both cases, the salvage value accrues to IT.
9. Referent Group Definition
For the purposes of the analysis, the referent group includes all stakeholders except:
• The concessionaire
• Foreign labour
• The foreign lender
This definition ensures that the analysis focuses on the net benefits accruing to domestic stakeholders and the broader national interest.
However, for negotiation purposes, ITG also requires insight into its own net benefits under different scenarios. Therefore, the Investor Benefit-Cost Analysis (BCA) should:
• Report the returns on equity for both the private concessionaire and ITG
• Allow comparison of outcomes under alternative financing and operational scenarios.
10. Your Task
Part 1- Spreadsheet Task – 30 marks (20%)
[Use the template Excel File on the BB website]
You are required to undertake a comprehensive benefit-cost analysis of the proposed project, considering two scenarios:
• With tolls continuing after 2046
• Without tolls after 2046
To analyse these two scenarios, please use the dummy variable provided in the template (Cell I10 in the Key Variables tab).
• Set the dummy variable to 1 if tolls are scrapped after 2046.
• Set it to 0 if tolls continue beyond 2046.
For guidance on using dummy variables in scenario analysis, please refer to the Lecture 10 slides.
Your analysis must include the following perspectives:
• Market analysis
• Investor analysis
• Efficiency (social) analysis
• Referent group analysis (disaggregated)
Recall that all calculations in your CBA must be expressed in Australian dollars ($A) using the exchange rate provide.
Discount Rate Assumptions
• Use a 6% real discount rate as the base case, in line with ITG’s public sector investment guidelines.
• Conduct sensitivity analyses using 9% and 12% discount rates.
• Note: The concessionaire requires a minimum real return of 12% on its equity investment. In your report, please assess whether the calculated IRR satisfies the investor’s requirement.
Sensitivity Analysis Requirements
You must assess the sensitivity of the results to the following key variable:
• Traffic Forecasts (as per Table 2):
• Low: 2% annual growth
• Base case: 4% annual growth
• High: 5% annual growth
Conduct sensitivity analysis with a focus on the net benefits to the referent group.
Spreadsheet Requirements
• Use the template Excel spreadsheet provided on Blackboard.
• These templates are essential for maintaining consistency and structure.
• Do not alter the structure of the templates under any circumstances.
Part 2 - Written Report Task - 30 marks (20 %)
Using the results from Part 1 of the case study, prepare a report including the following components:
1. Professional Recommendations
Provide clear, evidence-based recommendations to ITG regarding:
• Whether the project is economically and socially worthwhile
• Which scenario—continuation of tolls or removal of tolls after 2046—is preferable
• Justify your recommendation using results from the market, investor, efficiency, and referent group analyses
2. Sensitivity Analysis Discussion
• Summarise the results of your sensitivity analysis
• Recommend any additional variables that should be considered for further sensitivity analysis, explaining their relevance
Note: Do not include import duties or sales tax in your sensitivity analysis discussion, as these are assumed to be fixed and not subject to change.
3. Omitted Costs and Benefits
• Identify any potentially significant costs or benefits that were not included in the analysis
• Explain how these omissions could affect decision-making
• Suggest whether further investigation is warranted to assess their impact
Word limit: 1,500 words (+/- 10 %).
The rubric for this component of the case study can be found on the course website.