Project proposal; cost benefit analysis for road

A project proposal is a written document that presents the idea, objectives, plan, cost and expected benefits of a proposed project to convince the client, funder or approving authority to accept and finance it.

Cost benefit analysis for a road project

Cost benefit analysis (CBA) compares the money value of all costs and benefits of the road, discounted to present value, to decide whether the road is worth building.

Costs: construction (earthwork, pavement, structures), land acquisition and compensation, utility shifting, supervision, environmental mitigation, and periodic and routine maintenance.

Benefits:

• Saving in vehicle operating cost (fuel, tyres, repair).
• Saving in travel time of passengers and goods.
• Reduction in accidents.
• Benefit to induced and generated traffic.
• Wider benefits: access to markets, schools and health services, rise in land value, employment.

Steps: (1) forecast traffic with and without the road; (2) find unit costs and benefits; (3) work out yearly costs and benefits over the design life (say 20 years); (4) discount at the opportunity cost of capital; (5) compute NPV, B/C and EIRR; (6) carry out sensitivity analysis.

Illustrative calculation

Capital cost NRs 500 million (year 0); maintenance NRs 10 million per year; benefits NRs 90 million per year for 20 years; discount rate 10%.

$$\text{Annuity factor} = \frac{1-(1.10)^{-20}}{0.10} = 8.5136$$ $$\begin{aligned} PV_{benefit} &= 90 \times 8.5136 = 766.22 \\ PV_{cost} &= 500 + 10 \times 8.5136 = 585.14 \\ B/C &= \frac{766.22}{585.14} = 1.31 \\ NPV &= 766.22 - 585.14 = 181.08 \end{aligned}$$

Answer: $B/C = 1.31 > 1$ and $NPV =$ NRs 181.08 million, so the road is economically justified. The IRR on the net benefit of NRs 80 million per year is about 15.03%, above 10%.