Executive Summary
Investing in transport networks is an expensive exercise that calls for the government or the involved party to make a sound decision pertaining the undertaking.
In some situations, the developer is faced with the challenge of deciding the best project between renovating and upgrading the existing systems or developing new systems altogether. Consultants of such developers make use of scientific project management systems, particularly of transport investment evaluation principles and practices to advice the developer of the best strategy given the two possible undertakings given above.
Port Phoenix has been a major transport route between Dragon and Bharat and managed by Aquitania government, however the port is facing an increasing traffic as trade among the two countries improve. The main challenge facing Aquania, the managing and host country is how they can put the port into maximum use and facilitate trade.
The government engaged the services of Synergy Global Inc to advice on the way forward; the report by the consulting firm supported expansion of the port, however some governmental transport economist advised the transport minister to consider developing another port instead of expanding Phoenix. The minister is has the challenge of deciding the best approach to use given the objectives, aims, and goals that he want attained with limited resources at the countries disposal.
Projects objective
The Aquitania government through the ministry of transport has some national goals and objectives that it aims at attaining given the scarce resources in the country and the need to offer effective and reliable transport system. The following are the specific objectives that it aims at attaining:
- After the project, the country expects to have a reliable transport system that can handle the increasing trade and transshipment between Bharat and Dragon; the ministry of transport hopes that containerized trade will increase; this was after the realization of one of the highest growth rate at 9% for the years 2010-2011
- To reduce congestion that is experienced in the 2 lane highway that connects port phoenix to the city of San Ignacio
- To provide the country with an alternative transport system that reduces the road damages and delayed cargo delivery from among the trading countries
- Facilitation of trade and collection through the finances developed as the countries trade with each other
The above are the main objectives that the ministry want to attain with the project, however when dealing with transport project managed program, the program has the following objectives to deriver:
- Ensuring that the available resources have been invested in the best method possible given the alternatives available
- To ensure that the project is completed within the set time and cost frameworks
- Ensuring that resources, both human and physical resources have been managed effectively for the benefit of the country
Alternatives evaluated
There are two alternatives open to the Aquitania government, the first alternative will be implementing the strategy and advice given by SGI to make additional three shipping containers terminals at port Phoenix, and this would bring the total number of terminals to seven. Other than increasing the number of terminals, the government was expected to do some widening and modernization of the two lane highway that connects the port to the town.
The next alternative will be to have a new facility built at the north of the Phoenix port with an additional three berths; the port is likely to be situated at 120 km south east of the capital thus it is more likely to facilitate the movement of good to the capital thus facilitating trade; this was the decision of senior government officials.
The concept of best alternative
The best alternative for the country is the one that will attain the above set objectives within a minimum period of time at a low cost. Transport network are aimed at attaining national objectives that include improving economic, social and to some extent political goals within the country.
The government should consider the gains expected from either the project and ensure that the project with the highest gains is the one that has been implemented. Cost may be an issue however it should be looked at the long run level strategy. A long run costing strategy assumes that the best project should be considered with the benefits it will offer in the long run after implementation.
Other options
The situation on the port is urgent and wanting, there is need to have some short term measures to ensure that business goes on as usual at the same time keeping in mind that new project is coming up.
Identification and quantification of direct and indirect impacts of each option
When conducting a certain project, there are always some costs that are direct to the project as well as others that are dependent with the general operation of the project. The two alternatives open to Aquitania ministry of transport have costs as follows:
Extending the existing terminals
- Port digging costs that will be incurred if the expansion is done , it is expected at $2.5 million per year
- Land acquisitions
- Breaking water costs
- Construction of three berths
- Six cranes establishment
- Rail connections
- Road connections costs
- Highway/existing road Upgrading
Building a new terminal
- Port digging costs that will be incurred if the expansion is done , it is expected at $2.5 million per year
- Land acquisition
- Breaking water costs
- Construction of three berths
- Six cranes establishment
- Rail connections
Both the project will involve some labor, legislative and contracting costs.
The following are the costs of making summary:
Benefits
After the completing, the main monetary benefit that will accrue to the company relates to the gains that they will receive from trade across the berths. When trade is doing well then there will be an increased collecting thus the gains will be higher.
The benefits are estimated as follows:
Discounting of future costs and benefits of each alternative
Since the company seem to be operating at an inflated rate with the Aq$ rated at 1.1% of the real value, to discount the costs and benefits expected, then it is important to consider this rate as the discounting rate.
Time horizon used
To analyse the situation and the viability of the project, the time that was considered ranged from the time that the project was imitated until its expected time it will be giving positive results to the economy.
NPV results by alternative
When calculating the NPV, it will be assumed that both the projects have the capacity of giving equal income to the country thus the most important thing that will be considered is the cost outlay that will be incurred in the process.
From the above analysis, it is more economical to adopt the strategy of expanding the existing port, this decision has been supported by the low capital outlay that the project is likely to get than taking the route of having a new container terminal.
Identification and assessment of impacts of unquantifiable costs and benefits on each option
When analysis the costs and benefits of a project, there are some costs and benefits that cannot be quantified, they mostly take the form of social costs and benefits that a company incurs or benefits when the project is on course or after its implementation.
- Impact on Costs
Each project will come along with some social costs that include, damage of the environment, creating a route of social evils like corruption and prostitution. The magnitude of these costs cannot be fully be justified thus the Aquitania government will have to undertake the project without the quantifiable costs of these parameters.
In the case that the cost had been incurred, then there is a likelihood that they would have changed the analysis given above especially if they are high along the phoenix port. When expansion approach is adopted, there are high chances that the two roads to the port and the town will continue to have increased congestion and delays in delivery.
- Impact on benefits
With the project, there will come some social benefits that will accrue to the society and the government at large. The country will be able to handle the increased demand for transport thus facilitating trade among the countries.
The living condition of the people will be improved as there will be creation of job opportunities; from an indirect angle, the project is likely to lead to economic development of the country as trade is a major source of revenue. With such an increase, the citizens of Aquitania are more likely to benefit. There is the objective of reducing congestion in the 2 lane highway connecting the port and the city (Lock 75)
Sensitivity analysis
The chosen best method can be affected by a number of parameters that can be attributed to social costs and benefits. In the case that they are high, then the project direction and decision is likely to be hampered. On the other side in the case that it is minimal and people can live with it, then the project will not be much sensitive to the change and effects of social costs and benefits.
The discounting rate used is assumed to be the rate that money in the economy will lose value, this has been created from the belief that a future value of dollar is likely to be less valuable like a current dollar. When this has been put into consideration, the parameter that brought the 10% is the value at which the Aq$ is rate (the dollar is rated at 1.1 of the real value).
The project is also venerable to change in other costs and prices of goods. When this happens, then the project is likely to have changes in the estimated costs of completion. When the prices go up, then the cost of the project is likely to follow suit and the opposite is true.
Selection of preferred option and rationale for selection
- Justification for the use of NPV method of project evaluation
When using net present value, it takes into account the duration that the project is likely to be in operation then discount the income using cost of capital, if the NPV is a positive number, then a project is viable.
N.P.V. = (discounted outflows – initial capital)
When undertaking a project, the initial outlay plus the running expenses needs to be adequately covered by a project income. Capital outlaw in a business is an important aspect to consider when starting up a project, the capital initially employed in the business should be recouped at the end of the project and still give some benefit to the company: when considering the recouping care should be taken to take into accounts the time value of money.
Net present value helps to interpolate the present value of future income. When the N.P.V. it means that, the project is able to cover all the expenses that have been incurred when undertaking it. Expenses to be considered in a venture are both initial capital expenses and running costs; the method is a realistic (Lock 78).
- Ranking of alternatives against selection criteria
Holding social cost and benefits constant, the Aquitania government should consider expanding Phoenix port as the costs likely to be incurred in the expansion exercise are lower than the cost of making a new container terminal.
- Statement of preferred option
Despite net present value method of projects comparison having favored expansion of Phoenix port, the expected social costs from the expansion may reverse the decision. Since it’s a government funded project, the main factor to consider is improvement of social, economic, and political situation in the economy; when this is put into consideration, the best project to venture into is developing a new container terminal.
Works Cited
Lock, Dennis. Project management. New York: Gower Publishing, Ltd., 2007. Print.