Project Assessment at Railways

The Railway Minister, Ms Samta Banerjee has mooted the idea of running a Duranto Express Between
Mumbai and Baroda. The railway board has the task of examining the proposal. There will be, in fact two
trains running in the opposite directions, one in the morning and another in the evening every day. The
trains will make two trips, i.e., to and fro each.

The purchase cost of the trains is estimated at Rs. 20 crores, for both the trains put together. Of this, Rs.
10 crore is to be paid upfront and the rest on the delivery of the trains (i.e., engines and carriages) which
is expected one year after the initial payment.

In addition to purchasing the rolling stock, Railways have to make special arrangements for plateforms,
control rooms, installation of signaling systems, track modernization in certain sections and special
training for the staff to handle this new train. This would involve an investment of Rs. 50 crore in total.
However, only 50% of this would be required immediately, the remaining being payable when all
physical facilities get ready (which is expected in a year’s time from now).

The trains will have maximum seating capacity of 1000 passengers per train per trip. The price of the
ticket is tagged at Rs. 250 per passenger. The operating expenses of the train will have a fixed
component of Rs. 10 crore per year. The variable component is estimated at Rs. 25 per passenger.

Railway board traffic analysts estimate the following figures for traffic intensity:

No. of Passenger per Trip Probability

1000 0.1
900 0.2
800 0.3
700 0.2
600 0.1
500 0.1

It is also estimated that every year the trains will run for 330 days.

The economical useful life of the Duranto Express is taken as 10 years from the next year. We are
currently in the year 2013.

The Railways being a Government Department, uses 8% as a required rate of return.

Help the railway board in evaluating the proposal.

 Scope of the Railway Assessment Problem

The assignment may address the following issues:

a. What is the expected revenue stream in a year?

b. What is the total expected cost (both Fixed and Variable)?
c. What is the net income per year?
d. How will the net income stream look like given a useful life of 10 years for the two
years?
e. What are the depreciation values in each year assuming straight line method?
f. What are the depreciation values in each year assuming sum of the digits method?
g. What are the depreciation value with constant declining percentage (assume the values
of 10%, 15%, 20%)?
h. What are tax implications yearly for the 10 years of useful life of trains? Incorporate the
concept of depreciation. What is the impact on NPV?
i. What is the impact of inflation on the net income after tax? How the NPV value is
impacted?
j. Perform the sensitivity analysis for the useful life span of train. Currently it is 10 years.
Find at what life span, the NPV tends to become zero?
k. Perform the sensitivity analysis in case there is delay in the construction of
infrastructural facility? At what delay, the NPV becomes zero?
l. Perform the sensitivity analysis in case there is a change in the number of operating
days in a year. Currently, the number of operating days is 330 in a year. What is the
number of operating days at which NPV becomes zero? Is it sensitive measure?
m. What will be the impact on the NPV if there is a salvage value of Rs. 10 Crores for the
trains after its economical life?