A container terminal has annual throughput of 100,000 TEUs which has already reached the maximum capacity of the terminal based on the existing channel that can allow container ships with maximum capacity of 6,000 TEUs to berth in the container terminal. A proposal of port development project involving channel dredging, quay length expansion and quay crane upgrading of the terminal will allow container ships up to about 12,000 TEUs to berth in the terminal and support a growth of throughtput by 5,100 TEUs per year for the coming 20 years.

Because of economies of scale, the total operations costs (including cost of ship’s time in port and cost of loading/discharging operations) can be lowered by 9 dollars per TEU each year if container ships with 12,000 TEU capacity can enter the port for loading & discharging containers upon completion of the project. The estimated economic life of the project is therefore 20 years. The financing of the project requires an annual capital recovery of 13% of the initial investment 8 million dollars throughout the economic life.

Upon completion of the port development project at the end of the first year, the annual maintenance cost becomes 800,000 dollars and will increase by 40,000 dollars each subsequent year. Assume that the annual interest rate to be 12% for the coming 20 years. Remarks: For the purpose of fair evaluation on extra maintenance cost incurred in each year after completion of the project, you should also note that the annual maintenance cost of the existing terminal (without the project) is about 600,000 dollars by the end of the current year and will increase by 50,000 dollars at the end of each subsequent year.

Apply the principle of net present values (NPV) to evaluate whether or not it is viable to conduct the port development project. Make any rational assumption(s) if necessary and please be reminded to explicitly write down your assumption(s) in your answer.

If you work out manual calculation in MS Word document instead of MS Excel spreadsheet, you must present the working steps in formulas or equations used.