A 120 km railway line is proposed to link two cities. Construction cost is £480 million (paid at year 0). Annual operating cost is £12 million. Passenger trips start at 2 million per year and grow at 3 % per year; the average fare is £15 and rises with inflation at 2 % per year. The railway saves £4 million per year in road‑maintenance costs and reduces CO₂ emissions valued at £0.8 per tonne; emission reductions start at 5 000 t yr⁻¹ and grow at 1 % per year. Using a real discount rate of 5 % and a 30‑year analysis period, calculate the net present value (NPV) of the project. Is the project economically viable (NPV  0)?

Question

A 120 km railway line is proposed to link two cities. Construction cost is £480 million (paid at year 0). Annual operating cost is £12 million. Passenger trips start at 2 million per year and grow at 3 % per year; the average fare is £15 and rises with inflation at 2 % per year. The railway saves £4 million per year in road‑maintenance costs and reduces CO₂ emissions valued at £0.8 per tonne; emission reductions start at 5 000 t yr⁻¹ and grow at 1 % per year. Using a real discount rate of 5 % and a 30‑year analysis period, calculate the net present value (NPV) of the project. Is the project economically viable (NPV > 0)?

Accepted Answer

£261 million (positive, project viable)

Gce Model Questions Vol1 2020 Geography Question 50

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