You are required to perform a project appraisal of two options for 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 as a result of one of the options. 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% for both of the options considered.
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 cost method, deriving average usage figures from Table 1 below. Note there is no entry/admission cost for using the park, and that times and distances given in Table 1 relate to journeys to and from the park for each zone.
|Zone||Average time (hrs)||Average Distance (km)||Average No. of Visits Lost (per year)|
Table 1: Zonal Travel Cost Data
Use the zonal travel cost methodology as set out here: http://www.cbabuilder.co.uk/Quant4.html. The average hourly wage rate is $35, and marginal vehicle operating costs are $0.30 per km.
There is a significant maintenance cost associated with the new road estimated at $250,000 per annum. This cost will begin in year 4 following the completion of the road and is expected to grow at an estimated 1.5% per year.
The benefits of the new road include reduced congestion and subsequent time-savings, as well as some estimated accident reduction.
Time savings per year are estimated as follows:
Delay costs for each class of vehicle are given in Table 2.
|Vehicle Type||Delay cost (Dollars/hour/vehicle)|
|Private cars and motorcycles||32|
|Light commercial vehicles||49|
|Source: adapted from BITRE (2009) Table T6.1|
Table 2: Delay Cost Data
These savings will begin in year 4 once the road is complete, and continue until the end of the BCA appraisal period (year 28).
Estimated benefits in relation to accident reduction are as follows: a reduction in the current rate of fatalities on the road by 1 per year, a reduction in serious accidents by 3 per year, a reduction in accidents causing slight injury by 50 per year, and a reduction in damage only accidents of 150 per year. Costs associated with each type of accident are given in Table 3 below. These reductions will all be made in the urban area around the town. The reductions should be included from years 4 to 28.
|$2.67 million per fatal accident|
|$266,000 per accident resulting in serious injury|
|$14,700 per accident resulting in slight injury|
|$9,950 per damage only accident|
|Source: BITRE (2009)|
Table 3: Cost per accident type
Option 2 is differs from Option 1 in that it takes a different route and so avoids the loss of the National Park. This entails extending the length of the road by an additional 10 kms, close to a residential area.
The increased road length means an increase in costs. Assume that land purchase, planning, site clearance, ground works, building materials and plant rental are all increased by 25% over Option 1 costs. Also assume that a further 20 workers will be required for construction, and that ongoing maintenance costs will increase to $300,000 per annum.
Increased road length also increases the probability of accidents occurring. Assume that the reduction in number of accidents of different types for Option 2 are:
All other costs and benefits remain the same as for Option 1.
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