Intelligent Transport System - Case Study Example

Intelligent Transport System-ITS Name: University: Course: Date: Financial Projections Cost Estimation Cost estimation is an important management activity during the preliminary stages of any project to support the long range plans and provide a gross estimate of funds need to successfully undertake a project. The essence of cost estimation is to come up with estimates that should very minimally vary from the actual cost when the project is implemented (Esty, 2004). Efforts towards this objective should use cost models that suit the situation around which a project is based and the experiences tailored on the organization in question. The technical division bearing the great understanding of items to be procured should therefore be well represented in the committee preparing the cost estimates. The Green Transport Green Car project to be undertaken by GTSL and the government is an Intelligent Transport System (ITS) integrating varied ICT applications both software and hardware. It is important to carry out a feasibility study to analyze the financial alternatives and the potential of the project. According to Fight (2006), this will include estimation of capital needs, range of cost of debt, revenue projections, operating costs and maintenance projections. The evaluation of the pros and cons should provide a clear checklist guiding the discussion applied in the cost estimation. In conducting the cost estimation, firstly an understanding and evaluation of the different hardware and software models available in the market needs to be carried out. The varied models available in the market have different inherent strengths, weaknesses or risks that requires technical understanding before settling on a specific model of software or hardware. Estimation in the tables and a number of cost generating tools may then be used to come up with schedules for both software and hardware. Infrastructure costs including constructions to house service centers, road side units and communication infrastructure costs that are incurred at the start of the project should also be included in the schedules. Among the identified software components identified include; Video Surveillance Subsystems Intelligent traffic control systems “Intermodal” transportation systems In-vehicle technologies Dynamic Message Sign (DMS) Subsystem Traveler advisory systems Telecommunication system Traffic Management information System Traffic Management Warning System Driver Information System Parking Information System The identified hardware components include; Advanced sensor Computers Computer terminals Electronics and communication technologies Gigabit Ethemet Switch Traffic Signal Controller Closed Circuit TV Cameras Video encoders and decoders System detectors Traffic Signal Controllers Database infrastructure Other overhead costs incurred during the life of the project are fixed in nature with minimum fluctuations from year too year. They include but is not limited to the listed items below; Wages and Salaries Office Expenditures Communication bills (Phone, Fax, Net bills) Water and Electricity bills Financial costs Stationery and other miscellaneous items Below is a summary table of the project component requirements and the components estimated costs from the construction phase of the project to its early operational phase. Table 1 Cost estimates for the period from 2012 -2016 Cost Component Estimated Costs ($ ‘000) 2012 2013 2014 2015 2016 Infrastructure and construction 40,000 20,000 5,000 5,000 - Hardware components 10,000 20,000 5,000 5,000 5,000 Software components 5,000 10,000 5,000 5,000 5,000 Overhead costs 15,000 10,000 10,000 10,000 10,000 Total costs 70,000 60,000 25,000 25,000 20,000 Below is a graph of the estimated cost expenditure over the next five years from the year 2012. Graph 1 Graph of estimated cost to be incurred to 2016 Project cost estimates vary according to implementation progression over time. At the construction and development phase of the project that comes first, GTSL shall incur greater cost in setting up, constructing the buildings and laying the infrastructure for the ITS. This cost reduces slightly during the start-up phase of the project that follows the construction phase. The cost incurred at this stage brings the project into operation according to the specifications agreed upon with the customer. Once the project starts, it moves to the next phase of operational phase. At this phase the project is complete and in operation. The cost stabilizes to fixed costs with occasional rise due to maintenance and repair demands (Odufalu, 2000). Table 2 Project budgetary financial requirement over the project phases Project Phase Year Cost Estimates ($’000) Construction and development phase 2012 70,000 2013 60,000 Start-up phase 2014 25,000 2015 25,000 Operational phase 2016 20,000 Total 200,000 Graph 2 Cost estimates to be incurred during the project phases Break Even Analysis Break even point refers to the point at which the performance of the project yields cumulative cash inflows from revenues that are equivalent to the costs incurred to generate the inflows. This implies that at break even point, the cost is equivalent to the price of the project. During the life of ITS implementation, the first short period involves a lot of cash outlay by GTSL than may be received from the government for the implementation of the project. This may appear as a temporary loss. However, as the government makes more payment for the project and as the amount of outlay on the project reduces the project begins to realize increasing profits. The break even point therefore falls towards the end of start-up phase or in the early operational phase of the project (Fight, 2006). The tabulated forecasts below of cost and price received from the year 2012 to 2016 can be used for break even analysis of the ITS project implemented by GTSL. Table 3 Project costs incurred and price received for the implementation of ITS project Period of Project (Year) Cost incurred during the period ($’000) Price received for the Project ($’000) 2012 70,000 40,000 2013 60,000 50,000 2014 25,000 60,000 2015 25,000 50,000 2016 20,000 50,000 Where as during the first year, 2012, $70 million is incurred in implementing the project, GTSL receives $40 million from the government being periodic payment for the project. During the second year, a cumulative of $130 million is spent on the project while a cumulative of $90 million is received. GTSL is spending more on the project than the revenues it is receiving. On the third year, 2014, GTSL will spend cumulative $155 million and will receive $150 million. However, during the fourth year, 2015, GTSL will spend cumulative $180 million and will receive $200 million making a profit of $20 million. It is at the point in the year when the cumulative expenditure equals the cumulative revenue that we have the break even point. In the subsequent years GTSL is making profits as the cumulative revenues received shall be higher than the cumulative expenditure. The following graph indicates the break even point at the point of intersection between the cost line graph and the revenues line graph. Graph 3 Cost and Price curves indicating the break even point at the point of intersection Cash flow Projections As GTSL signs an agreement with the government for the implementation of the project, GTSL will be committing itself to spend cash to see to the fully implementation of the project while the government will promise to pay GTSL the price for the project. GTSL will therefore have a cash outflow in meeting the costs for the project realization while it shall consider any payments by the government as cash in-flow. Caution should be exercised here so as to draw the difference between the cost incurred and the cash outflows on one hand, and the price of the project at any point of the project and the cash inflow received from the government during the time. The difference between the price and the cost results in either a profit or a loss while the difference in cash flows results in either a positive or a negative balance in the cash or bank account The projections below show the cash inflows, the cash outflows and the cash balance at hand or at he bank at different times of the project. Table 4 Table of cash flows and the balance at the end of each of the years Project Period (Year) Cash outflow during the period ($’000) Cash inflow for the Project ($’000) Cash balance ($’000) 2012 70,000 40,000 -30,000 2013 60,000 50,000 -10,000 2014 25,000 60,000 35,000 2015 25,000 50,000 25,000 2016 20,000 50,000 30,000 Final Findings and Recommendations Market Viability A new product such as the ITS is created to satisfy the market and the users needs (Nieuwenhuizen et al, 2004). The government, charged with reducing traffic congestion, reducing accidents, reducing transportation costs, and improving the environment seeks an offer to assist it in fulfilling these obligations. GTSL is offering to supply the implementation of the project to satisfy the need. In doing so, GTSL is therefore, asserting that it’s ITS product evaluated meets the market demands. ITS is promising to be the solution to the road vehicular transportation and a revolution in the road infrastructure not only in Australia but to other cities in the world who too have not had a solution to their road transport systems. Technical viability This refers to the ability of a product to perform or to be utilized and deliver the results that it promised to deliver. If customers get the benefits for which they purchased a product then such a satisfaction from the product is described as the product meeting its technical viability. In evaluating a products technical viability one assesses whether it is safe, environmentally friendly, its design, and its feasibility for production among other product inherent qualities (Fight, 2006). GTSL supplied ITS is a technology based on vehicle – vehicle communication and vehicle – Road side Infrastructure communication and is intended to make our lives better by reducing traffic congestion, reducing accidents, reducing transportation costs, and improving the environment. In availing all of these, it shall contribute to improving the quality of life. Reliance shall be placed on the ITS and it shall be expected to perform perfectly at all times otherwise serious injuries will result from road accidents, countless hours wasted and unnecessary fuel burnt due to traffic congestions. Business viability The viability of a business refers to its ability to generate profits sustainably over a long period of time. According to Nieuwenhuizen et al (2004), such a business is able to generate revenues from the sale of its products or services at a lower cost thereby making a profit from the difference between the revenues received and the costs incurred to generate the revenues. The lower cost could be through securing cheaper raw materials upstream in the chain of supply or downstream from lower cost of products distribution to the final consumer. The product design too could be a source of the business viability if the demand cannot be met by other suppliers. GTSL seeks to provide ITS which is an ICT technology meant to improve public safety, traffic management, freight transport, transit and traveler information or support. The project integrates the supply of both hardware components and software components to support the vehicular transport system. The supply of the project to the government, its maintenance and periodic improvements implies a perpetual demand for the system. Given the initial outlay costs, the maintenance and periodic improvements paid for by the government, the excess amounts received forms profits to be enjoyed by GTSL for as long as no other supplier comes up with a better vehicular management system and takes the business from us. Since business viability also includes expanding customer base and raising more revenues and profits, it is noteworthy to mention here that GTSL will seek to expand its services to other cities in Australia and other cities in other countries too. This is with the confidence that other cities too want to enjoy an improved quality of life for its dwellers through reducing traffic congestion, reducing accidents, reducing transportation costs, and improving the environment. Other determinant factors of business viability that GTSL like any other businesses will need to consider includes; Stabilization of cash flow; GTSL will need to prepare cash flow forecasts matching the projects and operations and put control measures over its activities so as to reduce adverse effects of runaway cash flows and stabilize the cash flows and working capital. Periodic analysis of long-term viability; At intervals of 2 to 5 years GTSL should perform situation analysis reviewing its strategies, policies and objectives so as to enhance the viability of the business of GTSL in the long run. It should also periodically evaluate its management structure, cost and capital structure and industry position. Management Viability Management is both the section of the organizational personnel as well as the process of getting the organization to attain its desired goals. Management viability will therefore be the ability of the managers to utilize both human and other organizations resources so as to have the organization or business attain its set objectives both short term and long-term. Generally management processes include planning, organizing, staffing leading, controlling. The management of GTSL is charged with the responsibility of ensuring that GSTL fulfills its obligations to other parties and stirring the company to reach the goals it has set for itself. In carrying out this general responsibility, the management shall also ensures that GSTL fulfills its obligation of implementing the ITS project that sets out to improve vehicular transportation in Australia. In order to perform well GSTL shall recruit management staff or promote staff with excellent interpersonal, technical, communication, conceptual and diagnostic skills so that they can perform well their management roles that are interpersonal, informational and decision making in the company (Jeff Roorda and Associates, 2010). GTSL shall have a multidivisional organizational structure with divisions according to the different projects undertaken by the company. The top level managers of GTSL who oversee the entire organization shall consist of the president, the vice president and the board of directors. They will formulate the strategic plans and policies of the company. They will also play a great role in funding the company thereby significantly guiding the direction the business takes. Under and accounting to the top management there will be the mid-level managers executing the formulated plans and policies. They will make decisions involving acquisition, allocation and controlling of the firms resources. Lastly the lower management level of supervisors and operational section heads shall ensure smooth running of day to day activities in the projects. Economic and Financial Viability Whereas business viability was about a project or business ability to generate sustained profits in the long term, economic and financial viability is about a projects or enterprise ability to maintain favorable cash flow, profitability, liquidity, capital structure and overall financial performance both short term and long term. Financial viability involves assessment of audited financial statements, budgets, performance reports and any other reports used for financial analysis (Benoit, 1996). At GTSL the prepared budgets, cash flow statements, statement of comprehensive income, statement of financial position and periodic management reports are used in carrying out financial analysis. The analysis includes profitability, solvency, liquidity and stability analysis. This is made easier by the use of computerized financial systems. However, financial experience and explanations by the accountants and financial experts greatly boosts the company’s assessment of the economic and financial viability of operations. Exit Strategy alternatives GTSL has several alternative options of withdrawing from its engagement in the ITS project when it deems fit to do so. In doing so, it will exit from the ownership of the project or some operations in the project. This may arise out of other reasons that may not relate necessarily to dwindling profits such intention to stick to or vary its core activities. GTSL could take either of these exit strategy; a) Obsolescence; GTSL may live with the project till it becomes obsolete as a result of invention of new better performing systems. This may mostly likely be due to adherence of system specifications initially agreed upon with the government without any improvements or alteration to fit new upgrades. If this happens then the government may withdraw from funding the ITS project in preference of the better performing system by a new supplier thereby forcing GTSL to exit (Miller, 2000). b) Expiry of contractual time; GTSL may exit from the ITS project due to expiry of time according to the agreed life of the project. If an agreement had been reached for GTSL to supply the system for a period of let say, three years, then upon the expiry of the scheduled time then the GTSL shall be forced to reapply for the supply of the service on different terms or exit all together (Fitzgerald and Machlin, 2001). c) Project hand over; if the terms of contract between GTSL and the government involved only system design, development and implementation testing and closure then this would imply that GTSL will know and prepare in advance the discontinuation of the project. d) Sub contracting; GTSL may enter into an agreement with another company to continue with the project. GTSL will thereby hand over the operations to the new subcontractor whom it will have to make payments to for the services. GTSL will not relinquish its obligation to the government but it shall not be more involved with the projects operations as the subcontractor will assume this responsibility. e) Other exit strategy; GTSL may sell its ownership or operations to another company either partially or as a whole. The new company owning the equity will thereby carry on with the project as if it was GTSL (Beenhakker, 1997). Recommendations GTSL in setting out to implement the ITS should ensure that its design, and specification are of such a high quality both hardware and software such that the system performance exceed the road users expectation of the best road surface transportation. The system should make lives better by reducing traffic congestion, reducing accidents, reducing transportation costs, and improving the environment. In availing all of these, it shall contribute to improving the quality of life. Reliance shall be placed on the ITS and it shall be expected to perform perfectly at all times otherwise serious injuries will result from road accidents, countless hours wasted and unnecessary fuel burnt due to traffic congestions reversing the gains it sought avail. GTSL should monitor the performance of the system and the developments in the road transport environment so as to improve the systems performance from time to time. With such a sterling performance of the system in the cities in Australia, GTSL shall raise the demand of the ITS product far and beyond the borders of Australia. This shall guarantee GTSL sustainable profitability now and in the future. Bibliography Beenhakker, H.L. (1997). Risk Management in Project Finance and Implementation. Westport, CT: Quorum Books. Benoit, P. (1996). Project Finance at the World Bank: An Overview of Policies and Instruments, (World Bank Technical Paper Number 312). Washington DC: The World Bank. COAG Road Reform Plan (2011). The COAG Road Reform Plan Feasibility Study and LocalGovernment Consultation Paper Melbourne Diaz, R.B. (1999). Impacts of rail transit on property values, Commuter Rail/Rapid transit Conference, American Public Transit Association, Toronto Doherty, M (2005). Funding public transport development through land value capture programs Esty, B. C. (2004). Modern Project Finance: A Casebook. New York, NY: John Wiley & Sons. Fitzgerald, P.F., and Machlin, B.N. (2001). Project Financing: Building Infrastructure Projects in Developing Markets (2001). New York, NY: Practising Law Institute. Frame, J. D. (2003). Project Finance: Tools and Techniques. Arlington, VA: University of Management and Technology (UMT) Press. Fight, A. (2006). Cash Flow Forecasting. Oxford: Elsevier Butterworth-Heinemann. Fight, A. (2006). Introduction to Project Finance: Essential Capital Markets. Oxford: Elsevier Butterworth-Heinemann. Grimes, A. and Liang, Y. (2008). Bridge to Somewhere: The Value of Auckland’s Northern Motorway Extensions, Motu Working Paper 08-07 International Finance Corporation (2002). The Environmental and Social Challenges of Private Sector Projects: IFC’s Experience, (Lessons of Experience Number 8). Washington DC: World Bank. Jeff Roorda and Associates (2010). The Local Roads Funding Gap: Study of Local Roads Funding in Australia 1999-2000 to 2019-2020, prepared for the Australian Local Government Association Miller, J.B. (2000). Principles of Public and Private Infrastructure Delivery. Boston, MA: Kluwer Academic Publishers and the American Infrastructure Consortium. Nieuwenhuizen, C., Le Roux, E.E. and Jacobs, H., (2004). Entrepreneurship and how to establish your own business. 2nd Edition, Juta, Pretoria, RSA. Regan, M. (2005). Infrastructure – A New Asset Class in Australia, Australian Centre for Public Infrastructure. The University of Melbourne: Hawthorn. Smith, J.J., Gihring, T.A, and Litman, T. (2011). Financing Transit Systems Through Value Capture: An annotated bibliography, Victoria Xia, W. & Lee, G. (2004). Grasping the complexity of IS development projects. Communications of the ACM, 47(5), 69-74. World Bank (2007) World Infrastructure Report, Washington. Odufalu, O. (2000). The Principle and Techniques of Project Analysis and Evaluation. Lagos, Nigeria: Y2K Academy Ltd. Read More