(1) Explain the term, ‘Cost-Benefit Analysis (CBA) and discuss its advantages

as a framework for project evaluation in the public sector. (15 Marks)

(2) Massey Street Children Hospital Management Board requires an alternative
accommodation for her student nurses. The present building is to be
demolished and reconstructed. The reconstruction will last for five years.
Other buildings within the vicinity of the hospital are available for rent/lease
for the next five years.
The following data have been supplied by the landlords of Getwell Building
and Allwell House:
Years 1 2 3 4 5
N’000 N’000 N’000 N’000 N’000
Getwell Building Annual Rent 360 376 392 412 412
Maintenance Cost 300 300 300 350 350
Allwell Building Annual Rent 380 380 380 410 410
Maintenance Cost 260 260 260 280 280
The agreement with Getwell Building landlord requires that N 48,000 should
be settled with the first rental payment to cover legal fees. Allwell House
will be redecorated at a cost of N24,000 at the end of the lease. The annual
rent payments are to be discounted. Take Cost of Capital to be 14%
Required:
(a) Compute the discounted rent payments to the landlords of
(i) Getwell Buiding
(ii) Allwell House (10 Marks)
(b) Identify which of the alternatives to pick in (a) above. (2 Marks)
(c) Comment on your recommendation in (b) above. (3 Marks)

(3) (a) Define the term ‘Cost-Benefit Analysis’.

(b) The following discounted cost and benefits are related to five different
public projects in Agidi Local Government of Birigidi State.
A B C D E
N’000 N’000 N’000 N’000 N’000
Discounted Cost Streams 5,000 10,000 6,000 12,000 15,000
Discounted Benefits 12,500 11,000 10,000 13,000 18,000
The Local Government has budgeted a sum of N26,000,000 to be invested in
undertaking the different projects.
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 You are required to:
(a) Calculate the benefit/cost ratio of each project. (3 Marks)
(b) Compute the net benefit/cost ratio of each project(10 Marks)
(c) Advise the Chairman of the Local Government on the project that should
be undertaken. (2 Marks)

(4) Afaha Inang State is currently prosecuting rural electrification programme

to enable it meet the total needs of its citizens. To this end, the Independent
Power Project Board of the State advertised and obtained quotations from
the two leading companies in the industry. These are Bush Electrics
International and Putting Technologies.

Year Bush Electrics International Putting Technologies

N billion N billion
1 27.0 29.5
2 27.5 28.0
3 27.5 22.0
4 28.0 25.0
5 29.0 28.0

The decision of the Board will be based on the outcome of the Net Present
Value of the projects over the said period of time which will hopefully continue
during the life time of the projects. The cost of capital of both projects will be
maintained at 15% discount factor.
All calculations should be made to four decimal places.
Required:
Compare the two projects and advise the Board on the right choice. (15 Marks).

(5) (a) State ONE advantage and ONE disadvantage of each of the following
methods of investment appraisal:
(i) Pay Back Period
(ii) Accounting Rate of Return
(iii) Net Present Value (3 Marks)

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 (b) The Hospital Management Board of the University Teaching Hospital,
FIKA STATE, uses the Pay Back Period to evaluate its projects. The projects
and the cash flows envisaged for the year 2007 are
CASH FLOWS
PROJECT P Q R
YEAR N’000 N’000 N’000
1 37,500 60,000 75,000
2 37,500 45,000 60,000
3 40,000 30,000 48,000

The Board has decided to set aside the sum of N105 million as initial
investments in each project.
Required:
(i) Calculate the Pay Back Period for each Project.
(ii) Advice the Board on the Project to accept, out of the three, based on
Payback period evaluation in (i) above. (12 Marks)

(6) (a) Explain what is meant by the Cost-Benefit Analysis (CBA) (6 Marks)
(b) Highlight any three merits of the CBA approach to public project
appraisal (9 Marks)

(7) Ire-Akari Local Government is considering projects A and B which have the
following cash flows:
Year 0 1 2 3 4 5
Cash A(N 1,300 250 750 400 150 100
Flows B(N 1,200 400 500 600 600 300

Required:
(a) Use the table above to compute the Net Present Value (NPV) of the two
projects, given that the cost of capital is 15%. All calculations to 2 decimal
places. (11Marks)
(b) Advise the government on which of the projects to undertake and give
reasons for your answer. (4 Marks)

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 (8) Ajumose Local Government is planning to construct a road using either of two
methods of construction. The following data were given:
Method 1 Cost per kilometer
N’000
Initial Cost Capital 50,000
Cost of Maintenance every 3 years 10,000
Method 2 Cost per kilometer
N’000
Initial Cost Capital 39,200
Cost of Maintenance every 3 years 12,000
Additional information
It is expected that the road will have a maximum life of 18 years, if properly
maintained. It is required to determine the cost effectiveness of each method at
10% rate of interest.
Required:
(a) As an expert in project appraisal, advise the local government on which of
the methods to use. (13 Marks)
(b) Explain the term “Project Appraisal”. ( 2 Marks)
(9) SAB Airways Authority (SAA) is preparing the capital budget for the forthcoming
year. Three (3) mutually exclusive projects are being considered. The projected
performance of each of the projects is as follows:
Projects: A B C
N‘000 N ‘000 N ‘000
Initial Cash Outlays 3,450 3,563 3,938
Inflows of Cash:
Year 1 1,500 2,250 375
Year 2 1,500 1,125 375
Year 3 1,500 1,125 4,875
The Authority’s cost of capital is 10% per annum.
As the Management Accountant of the Airways Authority, advise on the desirability or
otherwise of choosing any of the three projects, using the internal rate of return method.
The following discount factor table is applicable for use:

Year 10% 15%

1. 0.91 0.87
2. 0.83 0.76
3. 0.75 0.66
4. 0.68 0.57
5. 0.62 0.50

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QUESTION 10
a. Mr. Make-No-Mistake has N200,000 which he decides to invest if he can secure
an assurance that the investment will earn at least 10% p.a. He is considering three
projects:
Project A: will earn N218,000 at the end of the 1st year.
Project B: will earn N250,000 at the end of the 2nd year and
Project C: will earn N140,000 at the end of 1st year and another N100,000 at the
end of 2nd year.
If none of the projects is undertaken, Mr. Make-No-Mistake will invest his
N200,000 in something else that will earn him 10% p.a.
You are required to assess and advise Mr. Make-No-Mistake on which of the
projects he should undertake. (12 Marks)
b. Identify THREE main features of Cost-Benefit-Analysis in public project
appraisal. (3 Marks) (Total 15 Marks)

QUESTION 11
Owode Water Board of Yelwa State decided to expand its facilities to make portable
water available to the community. The state government expressed interest in the
project and invited the Federal Government and the World Bank to participate in it.
Eventually, it was agreed that the project which would span over three (3) years, would
be financed as follows:
%
Owode Water Board 20
Yelwa State Government 25
Federal Government 25
World Bank 30
100
Experts estimated that the project will cost N20 billion, at today’s monetary value. The
World Bank is ready to pay its own contribution immediately. The Federal Government
will pay in one year’s time while Yelwa State Government and Owode Water Board will
pay their own contributions in 2 years time.
The project was contracted to BABLOD Work Limited based on the agreed schedule of
Contributions. Additionally, an extra amount of N5million will be paid to the contractor by
the completion of the water-project in year 4 by the Water Board. Payments not made
immediately will attract interest at 14% per annum.
You are required to compute:
(a) The cash payable and actual payments made by each contributor, showing the
year of payment applicable in view of the time value of money.
(b) The eventual cost of the project in present value terms.

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QUESTION 12
The following estimated costs and benefits relate to FIVE different divisible
projects of Eleweran Local Government. The local government has budgeted the
sum of N100,000,000 to undertake the following projects:

A B C D E
(N’000) (N’000) (N’000) (N’000) (N’000)
Estimated Cost of 20,000 40,000 24,000 48,000 60,000
Investment
Estimated Benefits 50,000 44,000 40,000 52,000 72,000

You are required to:

i. Calculate the benefit/cost ratio of each of the five projects. (11/4Marks)
ii. Compute the net benefit/cost ratio of each project (33/4Marks)
iii. Compare the results in (i) and (ii) and advise the chairman of the local
government on the project to be undertaken. (5 Marks) (Total 15 Marks)

(13) Kajola Local Government Council is considering investing in one of three

available projects of ‘A’, `B’, and ‘C’. The following information is available:
Project A Project B Project C
N N N
Initial investment sums 15,000 20,000 20,000
Residual Value 1,000 1,000 1,000
Profits/Cash inflows: Year 1 6,000 10,000 1,000
Year 2 7,000 10,000 6,000
Year 3 8,000 1,000 10,000
Year 4 9,000 1,000 20,000

Assume that the projects are mutually exclusive. Take cost of capital to be 10%.
(a) Using the ‘Pay-Back Period’, ‘Net Present Value’ and ‘Accounting Rate of Return’
methods of appraisal, advise as to which of the projects should be picked under each of
the scenarios stated above.

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(14) The Highways Department of the FULANI STATE MINISTRY OF PUBLIC
WORKS is responsible for operating a Toll Gate on the Hausa-Kanuri Road in the
State. The Chief Highway Engineer has reported the need to carry out urgent repair
works, between Km 2 + 250 and Km 9 + 600, the failed portion of the road leading
to the toll gate. Furthermore, he is of the opinion that unless some repairs are
undertaken immediately, the toll gate will have to be closed. The Chief Highway
Engineer has also pointed out that the volume of traffic/commuters using the road
during the third quarter of the year is low relative to the rest of the year.
It is now the end of the first month and he has submitted the following repair
options for the consideration of the Honorable Commissioner for Public Works,
namely:
OPTION 1: To close the toll gate for 15 weeks and complete repairs, once and for
all, in one operation. The opportunity cost will be an immediate repair cost of
N 1,152,000 and the loss of toll revenues of N32,000.
OPTION 2: To carry out the repair works in phases, over the third quarters of the
next three years. The opportunity cost will be an immediate repair cost of
N 432,000 two years from now and N480,000 three years from now. This option
will lead to traffic hold-ups, necessitating the diversion of users of the toll gate to
an alternative route. Loss of revenues from toll charges is estimated as follows:
N72,000 This year
N93,600 Next year
N96,000 Two years from now
N110,000 Three years from now
The Ministry can currently borrow funds from financial institutions at
concessionary rate of 10% per annum.
You are required to:
(i) Calculate the net present value of the two repair options
(ii) Identify the most-effective way of undertaking the repairs, giving your
reasons
(iii) State two other factors that should be considered

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