Economic Feasibility Study

Any investment project will have cost and benefit. We are going to list these cost and benefit of a bus public transportation system as a project evaluation and then we will compare the total cost and the total benefit. If the total cost is bigger than the total benefit, then the system is not feasible. If the total benefit is greater than the total cost, then the system is feasible.

Based on this simple knowledge of total cost and total benefit, we can measure three indicators of economic evaluation

1. Net Present Value (NPV) = Total Benefit - Total Cost
2. Benefit Cost Ratio (BCR) = Total Benefit / Total Cost
3. Internal rate of Return (IRR)

Using NPV as indicator, we convert all the cost, and benefit of any year into present year. Then NPV = B-C. If the value of NPV is positive, the project benefit has more than the cost, and then the project is feasible.

Using BCR method, we convert all the cost, , and benefit of any year into equivalent basis (i.e. present year, or annual or future year). Then BCR = B/C. If BCR value is bigger than 1, benefit has more than the cost, then the project is feasible.

In IRR method, we convert all the cost, , and benefit of any year into equivalent basis (i.e. present year, or annual or future year). Then we compute the interest rate (= IRR) which make the B = C for the same number of year of the project life. Then we compare the IRR with the bank interest rate. If the project IRR is higher than the bank interest rate, your project is feasible.

Don't worry about how to convert the cost and benefit to the equivalent basis. We are going to do that in later section . For now you just stick on the meaning of cost and benefit.

The cost of bus system will include:

1. Purchasing cost . You need to buy the buses. Let us consider the government will buy new buses.
2. Operation cost . To run the bus, we need driver and gasoline
3. Maintenance cost . Every some number of km, we need to replace the engine oil, tire. Every day, the bus needs to be cleaned. Every year, the bus may need some painting.
4. Administrative cost : Every year, the bus need engine inspection fee, vehicle tax and every month we need to pay the administrative officers as operator of the system.

The benefit of the bus will include:

1. Income from the bus users . This will be depending on the fare system and number of passengers.
2. Salvage Value . Price of the bus when sold after being used. For example, after operated for 10 years, the local government can sell the bus in an auction and still earn some little income.
Subsidy from the local government . In case the system is not feasible, and the local government want to keep this new bus system to run (due to some political reason), certain amount of limited subsidy can be provided by local government every year.

Preferable reference for this tutorial is

Teknomo, Kardi (2006) Tutorial on Feasibility Study. http://people.revoledu.com/kardi/tutorial/What-If-Analysis/index.html