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Agia FerdianAndi Wahyudi

Christine HermawanDavid Tarigan

Faiz M. ZeinHadi Mukhaiyar

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Capital Budgeting Process

Internal Rate of Return (IRR)

Return (net cash flow)

IRR

Initial cost of project

Rt =

k* =

C0 =

0

1 (1 *)

n

t

t

t

R

Ck!

!

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Eurotunnel Project

In 1987, the French and British launched theEurotunnel

The Eurotunnel is a project to provide a rail link under

the channel separating England and France.

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Expectations The project was expected to be completed in 1993 at a

cost of $7 billion Hoped to be able to generate enough revenues to pay

the interest on the amount borrowed from aconsortium of 225 banks

Also expected to provide a return to stockholders fromthe 15 million passengers it was expected to trasnpoert

each year.

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Expectationsy Kent's (UK) regional development would benefit from

the tunnel. Gains are in the traditional industries and

are largely dependent on the development of AshfordInternational passenger station, without which Kent

would be totally dependent on London's expansion.

y and Nord-Pas de Calais (France) Nord-Pas-de-Calais

enjoys a strong internal symbolic effect of the Tunnelwhich results in significant gains in manufacturing.

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y It brings the image of a region being connected to theEuropean high-speed transport and active politicalresponse

yIt encourages small-medium enterprises located in theimmediate vicinity of the tunnel.

y The South East of England is likely to benefitdevelopmentally and socially from faster and cheaper

transport to continental Europe.y The channel will also reduce significantly the travel

time from london to Paris.

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What HappenedHowever, the project was completed in 1995 ata cost of $ 16 billion and has only 6 million

passengers per year. by the end of 1997, TheEurotunnel had incurred more than $3 billionin losses, and its 750,000 shareholders weretold not to expect any dividends begore 2004.

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Causesy Comprehensive and expensive evaluation of the

topography and geology

y Incidents: fire, train failure, etcy High interest

y High competition with other kinds of transportation

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Cost Benefit Analysis

y CBA is used in the assessment of whether a proposed

project is worth doingy It compares the total expected costs of each option

against the total expected benefits

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Performing Cost Benefit Analysis(CBA)Example:Cost for the proposed system ( figures

in USD Thousands)

Benefit for the propose systemProfit = Benefits - Costs= 300, 000 -154, 000= USD 146, 000Since we are gaining , this system isfeasible.

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