Canberra Airport Project: Financial and Economic Project Appraisal

This report provides a financial and economic appraisal of the Canberra Airport project, focusing on two proposed options (K1 and K2). It evaluates the net present value (NPV) from both a financial and economic perspective, considering factors like inflation, borrowing rates, generated traffic, and opportunity cost. The K1 project involves significant reconstruction, while K2 focuses on minor upgrades. The financial analysis indicates that K2 has a positive NPV, suggesting financial viability, whereas K1 shows a negative NPV. However, the economic perspective favors K1 due to its potential to improve tourism and reduce travel times. The report also discusses the relevance of an industrial park and key strengths and weaknesses of each project, ultimately highlighting the complexities of balancing financial and economic considerations in project decision-making. Desklib provides students access to similar solved assignments and past papers.

Running Head: Financial and Economic Project Appraisal
1
Project Report: Financial and Economic Project Appraisal

Financial and Economic Project Appraisal 2
Contents
Introduction.......................................................................................................................3
Question 1.........................................................................................................................3
Net present value..........................................................................................................3
Financial perspective....................................................................................................3
Economical perspective................................................................................................4
Relevance of inflation rate............................................................................................5
Relevance of borrowing rate.........................................................................................5
Relevance of generated traffic......................................................................................5
Opportunity cost...........................................................................................................6
Do nothing case............................................................................................................6
Question 2.........................................................................................................................6
Key issues.....................................................................................................................6
Relevance of industrial park.........................................................................................7
Conclusion........................................................................................................................8
References.........................................................................................................................9

Financial and Economic Project Appraisal 3
Introduction:
The case explains about a project of the ACT (Australian Capital Territory). The
government wants to expand and improve the airport of Canberra. The government wants to
reconstruct the nearby area of the road whereas the other option of the company is to do
nothing and make the minor changes in order to upgrade the performance of the airport. In
the case, the financial and economical perspective of the business has been evaluated in order
to measure the performance of the project and make better decision about the position of the
business.
Question 1:
In this question, the urban department’s services and the project have been
undertaken. The case represents the K1 option and K2 option in order to identify the
performance of the business. While performing the task, following assumptions have been
made in the business in order to identify the net present value of the business:
 No taxes would be applied on any expenses or the income of the project.
 There is no depreciation on the project of the business.
 Discount rate has been used in order to identify the present value of the future cash
flows of the business.
 The revenue of the government for both the projects is similar.
Net present value:
Net present value of the business has been studied firstly and it has been recognized
that how much present value of the future cash inflows and outflows of the business are so
that a better decision could be made about the acceptance of the business. The net present
value on both the projects of the company has been done to identify that whether the project
must be accepted by the government or not (Lee and lee, 2006).
Financial perspective:
In case of K1 project, it has been identified that the total cash inflows of the business
would be $ 91.29 million and the total cash outflows of the business for the 30 years would
be $ 106.85 million. It describes that if the government would invest into this project than the
total present value of the future cash flows of the business would be $ -15.56 million which

Financial and Economic Project Appraisal 4
represents that the project is not a good idea in context to the financial performance and
management of the business. It also explains that if the investment would be done in project
K1 than it would lead to the business towards worst performance and the loss level of the
business would also be higher (Lumby and Jones, 2007).
Further, in case of K2 project, it has been identified that the total cash inflows of the
business would be $ 91.29 million and the total cash outflows of the business for the 30 years
would be $ 12.36 million. It describes that if the government would invest into this project
than the total present value of the future cash flows of the business would be $ 78.93 million
which represents that the project is a better idea in context to the financial performance and
management of the business. It also explains that if the investment would be done in project
K1 than it would lead to the business towards higher financial performance and the profit
level of the business would also be higher.
On the basis of the evaluation, it could be said that the financial perspective is in the
favour of the project K2 which explains that minor changes must be done in order to upgrade
and manage the airport.
Economical perspective:
Further, the study has been done on the economical perspective of the business to
identify the economical changes and the economical performance of both the projects, in case
of project K1, it has been found that the changes into the airport and the upgrade in the
nearby area of the airport would improve the tourism level of the country as well as it is
better option to improve the revenues of the government of the country. On the basis of the
upgrade, the travel timing of business and private would be reduced (Madura, 2014). The
project would make it easier for the citizen to access better place and make it easier to live an
accident free life. The household would also be satisfied with the changes because of better
environmental options. As well as, if the inflation rate and other factors of the business are
taken into concern than it has been found that the inflation rate would be improved in near
future so the current investment would be less costly for the business and improve the
economical position of the business.
In addition, a study has also been done on the project K2. Through the study on the
economical factors and its impact on the economical performance of the country, it has been
found that the changes into the minor changes into the report and nearby area of the airport
would be helpful to manage the current scenario but it would not be much attractive for the

Financial and Economic Project Appraisal 5
tourism and the travellers of the country. On the basis of the no upgrade case, the travel
timing of the individuals and business people would not be reduced (Kaplan and Atkinson,
2015). As well as, if the inflation rate, pollution cost and other factors of the country would
be improved in near future so the current investment would be less costly for the business and
improve the economical position of the business.
It explains that on the basis of the economical perspective, the project K1 is better
option. Now the government has to make decision about the project on the basis of the
financial and economical performance of the business.
Relevance of inflation rate:
The inflation rate is a phenomenon which affects the purchasing power and the
revenue of a business, It improves the cost level of the business which reduces the purchasing
power of the customer and the profit level of the business, It affects the future cash flows of
the business, the inflation rate or the discount rate are used in the business to identify the net
present value of the future cash flows of the business. This is one of the most used rates to
measure that how much changes would be occurred into the worth of the currency and what
would the future value of the net cash flows or vice versa. The relationship of NPV and IRR
could be understood through below given formula:
Nominal Discount Rate = (1 + Real Discount Rate) (1 + Inflation Rate) – 1
≈ Real Discount Rate + Inflation Rate (Lord, 2007)
This rate is used to discount the future cash flows to measure the present value of
those cash flows of the business.
Relevance of borrowing rate:
The borrowing rates describe about the total return which could be got by the
investors from the market without indulging into any kind of risk of the business. These rates
are known as risk free rate of the business which is used while evaluating a project in order to
identify the total discount rate of the business (Kaplan and Atkinson, 2015). the cost of
capital is determines on the basis of the risk free rate which is denotes as the discount rate on
the basis of which the future cash flows are denotes as the present value off future cash flows.
Relevance of generated traffic:

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Generated traffic stands for the total traffic and his cars which would be driven in the
roads and would improve the revenue of the project. The more the traffic of the business
would be, the more, it would be easier for the business to manage and improve the financial
and economical performance of the business.
Opportunity cost:
Opportunity cost stands for the loss of other alternatives which has been occurred in a
business in order to choose the other available alternative of the business. It represents about
the benefits which has been ignored by the business in order to gain the benefits from the
other projects. The opportunity cost of the business must be lower than the actual revenue of
the business (Horngren, 2009).
If in case the residential property would be acquired by the business in order to
upgrade the projects and the airport area than the total rent from that projects is the
opportunity cost of the business which would cause the loss to the government. The
government is required to measure that the total revenue from the residential property is
lower than the project otherwise the chosen project of the business would be a failure in terms
of the financial perspective of the business.
Do nothing case:
In case of project K2, the study on the economical factors has been studied. And it has
been found that the minor changes into the road and nearby area of the airport would be
helpful to manage the current scenario but it would not be much attractive for the tourism of
the country. The case explains that the project K1 would contribute around $ 50 million in the
total economy of the business which could improve the level of the economy at a great level.
However, if the investment would not be done in the project than the economic performance
of the business would be same (Lee and lee, 2006). As well as, if the inflation rate and other
factors of the business are taken into concern than it has been found that the inflation rate
would be improved in near future so the current investment would be less costly for the
business and improve the economical position of the business. So, it explains that the "Do
nothing case" of the government is not at all good in terms of the economical performance of
the business.
Question 2:
Key issues:

Financial and Economic Project Appraisal 7
The key issues related to each of the project of the government are as follows:
Project K 1 Project K 2
Strength:
 Economical performance of the
business is quite impressive.
 The opportunity cost of the project is
lower
 The earnings from the project are
quite impressive.
 The traffic rate in the project is higher
than the project K2 (Hillier, Grinblatt
and Titman, 2011)
Strength:
 Financial performance of the business
is quite impressive
 The earnings from the project is quite
impressive
 The cost level of the project is quite
lower.
 The present value of the future cash
flows of the business are positive
Weakness:
 Financial performance of the business
is not at all good
 The loss level of the project is quite
higher
 The inflation rate of the country is
higher
Weakness:
 Economical performance of the
business is not at all good
 The opportunity cost of the business
is higher
 The inflation rate of the country is
higher (Higgins, 2012)
Relevance of industrial park:
The project explains that the $ 100 million has been proposed by the government for
the industrial park near by the airport. The investment into the park is proposed in order to
improve the tourism level of the country as well as it is better option to meet the corporate
social responsibilities (Gapenski, 2008).
In case of the spin off effect, it has been measured the second economical effect of the
businesses through the spin off effect, it has been measured that if the project would be
accepted by the business than the economical performance would be improved by $ 50

Financial and Economic Project Appraisal 8
million but if the “do not case” is opted by the business than the economical level of the
business would be similar.
Further, in case of financial and non financial perspective of the business, it has been
measured that “Do not case” is better for the country in current scenario, the project could be
accepted by the business later on.
Conclusion:
To conclude, it is important for business so the government to measure each of the
project in terms of financial and non financial to make better decision, In this case it is
concluded that “Do not case” is better for the country in current scenario, the changes in the
airport and road could be done later on in order to improve the economical performance of
the country.

Financial and Economic Project Appraisal 9
References:
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial
management. Health Administration Press.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy.
McGraw Hill.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education
India.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Lee.C.F and Lee, A, C,.2006. Encyclopedia of finance, Springer science, new York
Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.
Lumby,S and Jones,C,.2007. Corporate finance theory and practice, 7th edition, Thomson,
London
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.