Agia Ferdian Andi Wahyudi Christine Hermawan David Tarigan Faiz M.

Zein Hadi Mukhaiyar

Capital Budgeting Process

Internal Rate of Return (IRR)

Rt (1  k*)t ! C0 t !1
Rt = Return (net cash flow) k* = IRR C0 = Initial cost of project

Eurotunnel Project
In 1987, the French and British launched the Eurotunnel The Eurotunnel is a project to provide a rail link under the channel separating England and France.

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 a consortium of 225 banks Also expected to provide a return to stockholders from the 15 million passengers it was expected to trasnpoert each year.

Expectations
y Kent's (UK) regional development would benefit from

the tunnel. Gains are in the traditional industries and are largely dependent on the development of Ashford International 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 Tunnel which results in significant gains in manufacturing.

y It brings the image of a region being connected to the

European high-speed transport and active political response y It encourages small-medium enterprises located in the immediate vicinity of the tunnel. y The South East of England is likely to benefit developmentally and socially from faster and cheaper transport to continental Europe. y The channel will also reduce significantly the travel time from london to Paris.

What Happened
However, the project was completed in 1995 at a cost of $ 16 billion and has only 6 million passengers per year. by the end of 1997, The Eurotunnel had incurred more than $3 billion in losses, and its 750,000 shareholders were told not to expect any dividends begore 2004.

Causes
y Comprehensive and expensive evaluation of the

topography and geology y Incidents: fire, train failure, etc y High interest y High competition with other kinds of transportation

Cost Benefit Analysis

y CBA is used in the assessment of whether a proposed

project is worth doing y It compares the total expected costs of each option against the total expected benefits

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

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

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