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Transport Economics

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Applied Economics and Marketing for Managers Assignment Part B 07235569 10/6/2008 Table of Contents Table of Contents 2 Abstract 3 Comparison of Financial Appraisal and Cost Benefit Analysis 3 Application of Cost Benefit Analysis on Metro Rail System set up in New Delhi 5 Financial Costs and Benefits of the Metro 7 Identification of Economic Benefits and Costs of Metro 10 Reference 12 Appendix 13 Stakeholder Analysis 13 Abstract Governments and private business houses have different objectives to achieve. Hence the approach to appraise the expenditure is different. Financial Appraisal and Cost Benefit Analysis are few techniques used by governments and private sector companies. Private sector companies look at the financial aspect of business, which are the profit, return on investment, net present value etc. State owned enterprise will also look at the society as well, along with the financial aspects. There are many projects that are done in public-private sector partnerships. The rationale behind any project could depend on many factors such as political, social, economic, environmental, technological etc. Transport is one such area where both private and public sector companies are interested. To identify the difference between the approaches that governments and private sectors companies we need to define Cost Benefit Analysis and Financial appraisal. Requirement of a well connected, suitable and affordable transport system is a need for every growing city in the world. Delhi Metro (DM) provides that along with many other benefits to the country. Success of DM is now extended to other major cities like Bangalore. Comparison of Financial Appraisal and Cost Benefit Analysis Appraisal of a project is defined as analysis of an investment made to determine its value and acceptability with respect to the criteria established. This can be done to assess the options, costs and benefits as the part of project identification process. Financial Appraisal is a comparison of cash inflows and outflows (cash flows of costs and benefits) ...read more.


Table 1: Overview of the MRTS Financial Costs and Benefits of the Metro Financial evaluation should be done first to indentify if the project is financially viable. The financial evaluation of a project requires the analysis of its annual cash flows of revenue and costs considering it as a commercial organization operating with the objective of maximizing private profits. The financial capital cost of DM represents the time stream of investment made by it during its lifetime. The investment expenditures made by the project in one of the years during its life time constitutes the purchase of capital goods, cost of acquisition of land and payments made to skilled and unskilled labour and material inputs for project construction. The operation and maintenance cost of the project constitutes the annual expenditure incurred on energy, material inputs for maintenance and payments made to skilled and unskilled labour. The investment goods and material inputs used by the project are evaluated at market prices, given the definition of market price of a commodity as producer price plus commodity tax minus commodity subsidy. If the government gives some commodity tax concessions to DM, they are reflected in the prices paid by DM for such commodities. If the financial capital cost of the project is worked out as the time flow of annualized capital cost, the annual cost of capital has to be calculated at the actual interest paid by it. This could be done using information about the sources of funds for investment by DM and the actual interest paid by it to each source. For example, if part of the investment of DM is financed out of loans provided by the government at the subsidized interest rate, the annual cost of this investment has to be calculated at the subsidized interest rate. Table 2 provides the sources of funding investments of DM (phases I and II). More than 60 percent of the funds required for investment are raised as debt capital. ...read more.


316.4 million during the year 2011-12. The General public representing the Indian society receives the benefits of social premium on investment and foreign exchange and the environmental benefits of reduced pollution due to the Metro. There are foreign exchange costs and foreign exchange benefits from the Metro. Foreign exchange cost accounts for 60 percent of the investment cost of the Metro. There are foreign exchange benefits to the extent of reduced fossil fuel consumption due to a change in the mode of transport. Murty and Goldar (2006) have estimated a 10 percent social premium on foreign exchange for the Indian economy. The net benefits to the general public from the Metro arising out of the social premium on foreign exchange is estimated as Rs. 1203.3 crores during the year 2011-12. There could be incremental benefits or losses of savings due to the Metro in the Indian economy depending upon the propensity to save of different agents affected by the project. Without accounting for the social premium on savings, the government, passengers, private transporters and the public get total net benefits worth Rs. 52550 million in the year 2011-12. Assuming a savings rate of 29.10 percent on an aggregate in the Indian economy in 2011-12, the incremental savings due to the Metro to the Indian economy works out to be Rs. 15290 million in the same year. Given an estimate of the social premium on investment as 36 percent (Murty and Goldar, 2006), the public receives benefits worth Rs. 5500 million on this account. It is assumed that the propensity to save of unskilled labour is zero in this estimation. Also the public receives benefits from the reduced air pollution due to the Metro. Section IV describes a method of estimating these benefits and provides an estimate of these as Rs. 6883 million in the year 2011-12. Therefore, public receives net benefits worth of Rs. 14260 million in the year 2011-12 due to Metro. ?? ?? ?? ?? Student Number 07235569 Page 7 of 11 Student Number 07235569 Page 1 of 11 ...read more.

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