ECON2101 Cost-Benefit Analysis

Semester 2, 2024

Case Study - Green Bridge

ALL SECTIONS DUE, 1pm 4th  November. Submitted online.

Instructions:

This assignment will consist of a CBA task worth 30% (spreadsheet and report) and a  reflective writing worth 10% for a total of 40% of your final grade. The case study can be done individually or as a group. Please note that this task is a significant amount of work for an individual, so groups are encouraged.

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) - only one submission per group is required.

•    Part 2 MUST be submitted as a Word file (.doc or docx) - only one submission per group is required.

•    Part 3 MUST be submitted as a Word file (.doc or .docx) - student must submit their own reflective task for marking.

Further details to be announced on Blackboard.

Groups must be finalised by 5pm, 31 October. No changes are allowed after this date.

Remember that each value should be entered into the spreadsheet only once.

Marked out of 80 points (weighted to 40% of your final grade).

Background:

As local councils recognise the growing importance of sustainable infrastructure, there is increasing emphasis on delivering projects that promote active and healthy lifestyles. This includes ensuring the development of pedestrian  and  cyclist-friendly  spaces,  which  not  only  support  individual  well-being  but  also  foster environmental sustainability and community cohesion.

Brisbane City Council is considering the construction of a new green bridge connecting two key suburbs: St Lucia and West End. The bridge will provide dedicated pedestrian and cyclist pathways, encouraging active travel and reducing car dependency. To evaluate the investment, the council has requested a cost-benefit analysis (CBA) to determine the feasibility of the project.

As part of this analysis, the council expects you to examine the potential costs involved in building and maintaining the bridge, along with the expected benefits to the community and environment. Additionally, the CBA should assess how the project aligns with broader sustainability goals, including Brisbane’s 2032 Olympic commitments and local environmental regulations.

The green bridge is expected to be operational by the start of 2028, with a 20-year operational timeline. The initial capital investment is scheduled for 2025, with additional infrastructure enhancements planned for 2026. In your report to the council, you will need to present the findings from the  Investor, Social, and Disaggregated analyses. Your report should also draw on relevant literature or case studies on the external benefits of sustainable transport infrastructure, supporting the council’s goal of enhancing active transport and community connectivity.

Part 1- Spreadsheet Task - 30 marks (15%)

[Use the template Excel File on the BB website]

a)    Market and Investor Analysis

The proposed development of the green bridge represents a significant investment in enhancing connectivity and  promoting  sustainable transport within the  community. This  project  aims  to  create  a  vital  link  for pedestrians and cyclists, encouraging active travel while reducing reliance on motor vehicles. To realise this vision, the council  has  outlined  a comprehensive  plan that  includes  the construction of the  bridge  and essential amenities to support its operation.

Before commencing the development, the council recognises the necessity of seeking legal advice to ensure compliance  with  all   relevant   laws,  regulations,  and  contractual  obligations.  This   legal  consultation   is projected to incur costs of $95,000. Alongside these legal fees, the council will invest in critical infrastructure, including the main construction cost of the bridge at $12,000,000, restroom facilities at a cost of $50,000, a lighting system for safety at $65,000, and safety fencing valued at $125,000. Additionally, bike racks will be installed at a cost of $50,000.

A key component of the project involves the construction of three retail spaces, with a construction cost of $75,000 per lot, providing opportunities for local businesses and enhancing community engagement.

Further to this, to create a welcoming environment, the council plans to enhance the surrounding landscape with green spaces, allocating $150,000 for landscaping in 2026. Additionally, the council will need to purchase the following items in 2026:

-      One complete set of maintenance tools to assist in the upkeep of the site at a total cost of $5,000.

-      A bridge inspection vehicle at the cost of $75,000.

-      200 litres of fuel at $2.30 per litre to initially fuel the worksite vehicle.

-      100 kilograms of fertiliser at $19.00 per kilogram for the green plants landscape.

-      50% of the totalarea of 3,200 square meters will be painted and coated at a cost of $150 per square meter.

As part of the project, the council will need to invest in working capital in 2027 to assist in maintenance of the facilities. The working capital items have been provided in Table 1.

Table 1: Working Capital

In addition to the working capital, the council expects the following operating costs:

Table 2: Operating Costs

Further to the information above, it is expected that 25% of the safety features, including lighting and fencing, will need to be replaced every year, and the facility will incura yearly administration cost of $9,200.

To ensure the maintenance of a vibrant and sustainable landscape surrounding the green bridge, the council will incur an annual operating cost of $25,000. This investment is crucial for the upkeep of green spaces, including regular landscaping services, plant care, and the management of any ecological features integrated into the project.

The local council owns most of the land around the proposed green bridge; however, it will also need to lease additional landon both sides of the bridge in St Lucia and West End to accommodate the project. The landis not viable for other development uses, so the council has reached an agreement with the owner to rent it for $2,250 per square meter, with payment to be made once the bridge is fully operational. The totalarea to be rented is 250 square meters, and this land will be leased for the duration of the project.

For the upkeep of the facility, the council’s expected wage expenses include:

-      One groundskeeper with a salary of $85,000 per year.

-      Three casual workers who are expected to work 35 days of the year (each), on average. Each day of casual labour is expected to cost $200 per worker.

Insurance  premiums to  cover  liability,  property  damage,  and  other  perceivable  risks  of  the facility. The premium amount is 2.5% of total fixed investment, this including the additional investment in 2026.

The anticipated revenue for the green bridge project encompasses several key components:

i.       Shop Rental Income: The project will include rental space for shops, charging $75 per square meter per week for each lot, which is sized at 50 square meters. This rental income will provide a steady revenue stream and encourage local businesses to thrive in the community.

ii.       Sponsorship  and  Advertising  Revenue:  The  green  bridge  project  is  also  expected  to  generate substantial income through sponsorship and advertising, with an estimated revenue of $2,100,000. This income will be vital in supporting the ongoing operations and maintenance of the project while promoting local businesses and organizations.

Revenue During the Olympic Games 2032: It is anticipated that the total yearly revenue will triple during the Olympic Games 2032, as the increased foot traffic and heightened visibility will attract more visitors and sponsorship opportunities, significantly boosting income during this period. It is assumed that revenue will be changed back to normal afterwards.

To finance the initial investment costs, the council will take out a loan of $3,000,000 at an interest rate of 4.5% per annum. The loan will have a 12-year term starting from 2026. Additionally, in 2028 the council will take out an interest only loan of $500,000 as a contingency for any unexpected costs. This loan will have a term of 5 years with repayments starting in 2029 and an interest rate of 9.5% per annum.

For depreciation purposes, only the following assets are eligible to be depreciated:

Table 3: Depreciation

Note that all assets are depreciated starting in 2026 with the exception of the bridge inspection vehicle. As bridge inspection vehicle is purchased in 2026, depreciation must begin in 2027. Other assets purchased as part of the initial capital investment are not eligible for depreciation.

The tax rate on profits is 30%. Assume the salvage value for all investment costs is 10% of the initial fixed investment cost plus 10% of the additional investment cost (for capital purchased in year 2026).

The green bridge project is expected to be under construction with no access until fully operational by the year 2028, setting the stage for these revenue streams to commence and grow in anticipation of the Olympic Games.

Using a conversion factor of  100,000 and the information above, you  have  been asked to calculate the following:

i)    The IRR and NPV for the Market Analysis at a 5%, 10% and 15% real discount rate.

ii)   The IRR on equity and NPV for the business at a 5%, 10% and 15% real discount rate for the Investor Analysis.

b)   Social Analysis

You now need to consider the social CBA. Due to taxes, duties, and subsidies you are required to calculate the relevant shadow prices for the following:

Table 4: Taxes and Subsidies *remember that duties are only paid once.

In addition to the information presented in Table 4, the council is set to receive a subsidy from the State government to support the development of the green bridge in preparation for the 2032 Olympics. It is anticipated  that  the  State  government  will  offer  a   30%  subsidy  for  the  construction  of  the   bridge. Furthermore, the government will provide a 20% subsidy for the landscaping and green spaces, aimed at enhancing environmental sustainability and the overall aesthetics of the infrastructure project.

It is also noted that land has an opportunity cost of $0 and the opportunity cost of labour is 60% of the market wage for casual workers. The groundskeeper is employed from elsewhere and should be costed at the market wage.

To estimate the external benefits of the green bridge project you consider the following benefits:

1)   The  Department of Transport and  Main Roads estimated that the project will reduce the average number of private transport users in the suburb by 750 per day, potentially saving 4 minutes per vehicle. The traffic delay reduction value is estimated at $20 per hour.

2)   Given the average trip distance saved in the suburb is 3 km, the annual avoidance can be measured by multiplying the number of reduced private transport users per day, the average trip distance, and the number of days per year.

3)   This reduction in private transport also impacts carbon emissions. If the average car emissions can be reduced by 0.19 kg per km, calculate the annual reduction in carbon emissions by using the carbon price per tonne. You are required to search for relevant literature and justify the proper carbon price to be used.

4)   The Australian Institute of Health and Welfare (AIHW) estimated that the average avoided healthcare cost per km is $3.20 for both cyclists and pedestrians. If the best estimation is that there are 1,200 individuals (cyclists and walkers) benefiting from this green project per day, with an average distance of 3 km per person, calculate the total health benefits per year from the impact of this green bridge.

i)            Building on the spreadsheet completed in a), calculate the NPV and IRR of the Social Cost Benefit Analysis using a 5%, 10% and 15% discount rate.

c)    Disaggregated Social Analysis

Now, as  part  of the  Cost-Benefit Analysis  (CBA),  you would  like  to  break  down  the  benefits  to various stakeholders involved in the green bridge project. This includes considering stakeholders withstanding, such as landowners, labour, banks, city council and government, to disaggregate and allocate the benefits to subgroups involved in the project. Using the template identify:

i)            The NPV for the total disaggregated group of interest using a 5%, 10% and 15% discount rate.

ii)           The NPV for each remaining stakeholder group using a 5%, 10% and 15% discount rate.

d)   Sensitivity Analysis

Nowas part of the cost-benefit analysis, the local council is interested in evaluating the assumptions and how sensitive or insensitive the results are to the best guess inputs. Specifically, the council would like to answer the following questions:

i)            There  are  two  key  inputs  that  are  uncertain  regarding  the  expected  external  benefits  from reducing road congestion in the suburb: the number of avoided private transport users and the traffic delay reduction value. The council would like to see how the Net Present Value (NPV) changes for the social analysis at a 5% discount rate. Allow the number of private transport users to vary around 750 by 20%, and the traffic reduction value to vary around $20 by 12.5% from the best estimate. Please comment on the results.

ii)           The council aims to achieve a Net Present Value (NPV) of 1.2 million dollar at a 5% discount rate to maximise the benefits from shop rentals. Use the “Goal Seek” function to determine the shop rental fee that should be charged to meet this target.

Part 2 - Written Report Task - 30 marks (15%)

Using your results from Part 1 of the case study, write a comprehensive report analysing the results of your CBA. In your report ensure you:

1)    Provide  professional  recommendations  to  the  council  on  whether  it  should  proceed  with  the development of the green bridge project. Your response should be based on thorough research of relevant  literature  on  the  economic,  environmental,  and  social  benefits  associated  with  green bridges.   Consider   long-term   impacts,   sustainability   outcomes,   and   any   associated   risks   or uncertainties.

2)   Outline the approach and results of sections a) tod) in Part 1. In your response you should investigate which variables should be subject to a partial sensitivity analysis in addition to the results of d).

3)    Identify considerations for your analysis or any alternative approaches that would improve on the current format of the CBA.

Word limit 1,500 words (+/- 10 %).

The rubric for this component of the case study can be found on the course website.

Part 3 - Reflective Assessment Individual Task - 20 marks (10%)

Critically reflect on the CBA task from the Case Study. In your answer,

1)   determine  and  establish  the  relevance  and  authenticity  of  the  case  study  task  as  part  of  your development in a professional context.

2)    reflect on your individual challenges or challenges faced as part of a group. Word limit 750 words.

The rubric for this component of the case study can be found on the course website.