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Group No. 5
Date
Contents
Introduction: 1
Objective: 2
Technical Information: 3
Economic Analysis: 4
NPV Calculation: 5
Technical Analysis: 8
1.Hypothesis Testing 8
3. Conclusion 11
References: 15
List of Tables 16
List of Figures 16
Introduction:
The 2020 Summer Olympics, officially known as the Games of the XXXII Olympiad is
an international multi-event set to take place in Tokyo, Japan, from July 24th to August 9th of
2020. The Olympic games are considered the world’s foremost sports competition with more
than 200 participating nations and thousands of athletes competing in a multitude of different
events. For the host city and country, the Olympics are an opportunity to showcase themselves to
the rest of the world. To accommodate for the massive expected influx of visitors to the country
Japan has plans to greatly increase the capabilities of their transportation sector. The Japanese
government plans on accomplishing this goal by constructing a new railway line that would link
both the Heneda Airport and the Narita International Airports, Tokyo’s major two airports. This
railway would cut travel time from Tokyo station and Heneda from 30 minutes to 18 minutes and
The East Japan Railway Company would be tasked with organizing this massive project
and an estimate 400 Billion Japanese Yen would be required to fund it. Because of growing
concerns of rapid population increase, the country has developed several programs to promote
infrastructure upgrades to public transit. In collaboration with the Japanese National Bank, the
country is offering up to 65% of the capital cost at lower interest rates, ranging from 10% to 17%
per year. The remaining funding would come from private investors. With such a dense
population, public transport is extremely important in Tokyo. Tokyo boasts one of the most
extensive urban rail networks in the world with over 158 lines, 4714.5km of operational tracks,
48 operators and 279 stations. As such, this new railway line would be a welcome addition to
Tokyo’s already extensive network and would see plenty of use after the completion of the 2020
summer games.
Objective:
The objective of this case study is to evaluate the feasibility of the construction of a new railway
line linking both of Tokyo’s major airports in preparation for the 2020 summer Olympic games.
Both economic feasibility and risk management and assessment will be taken into consideration
Olympics. As stated above, the required funding for the construction of the new railway is 400
Billion Japanese Yen. The project will be 70% funded by the National Bank of Japan with an
agreed upon 13% annual interest rate with a duration of 7 years. This loan will be of 280 Billion
Yen. The remaining 120 Billion yen will be funded by the East Japan Railway company directly.
The East Japan Railway will only agree to manage the project if it has a rate of return of at least
14%.
The Japanese economy has been reasonably stable over the past decade with an average yearly
inflation rate of only 0.5%. The figure bellow shows that the inflation rate increased by its
highest in 2014 but even then, it was only a 2.4% increase and the rate has since returned to
Source: http://www.inflation.eu/inflation-rates/japan/historic-inflation/cpi-inflation-japan.aspx
To accommodate for inflation, a 2% inflation rate will be used. With the current price of
electricity in Japan being 29 Yen per kW-hrs, the train is expected to cost 900 Yen per train mile
to run. This is a conservative estimate to account for any rises in the cost of electricity in the
near future.
Technical Information:
The proposed railway expansion is expected to span 56 miles, connecting both of Tokyo’s major
airports. With nearly 300 stations, Tokyo boasts one of the world’s busiest railway networks in
the world and is notorious for its rush hours. The evening traffic lasts until 10pm and the number
of passengers is projected to greatly interest during the Olympics. Annual train ridership is
estimated to be a staggering 13 billion people, twice the population of the entire world. Based on
data collected by Tokyo metro public relations, it is expected that 400 000 new passengers will
ride the train line daily that would not have normally taken the subway. This figure also takes
into consideration the additional commuters due to the Olympic games. The average cost to ride
the Tokyo subway is 800 Yen. Based on the current operating costs of similar lines in Tokyo it is
expected that the annual maintenance cost for line will be 290 Million Yen. All other operational
costs including labor have been projected to be 150 million Yen per year.
The East Japan Railway Company’s R&D team has come up with a new more efficient
high-speed rail system that is projected to be able to increase the expected number of passengers
to 480 000 per day. And the new more efficient system is expected to cut annual operation costs
to 110 Million Yen per year. The downside is that the high-speed system is expected to cost 25%
more to construct in the same time frame in order to be completed for the 2020 summer
Olympics. This would raise the total funds required to 500 Billion Yen with the same percentage
being funded by the Japanese bank and private investors. Maintenance costs are not expected to
change.
Let Case A be the alternative where the East Japan Railway company constructs the regular line
and let Case B be the alternative where they construct the high-speed line.
Economic Analysis:
I. Bank Loan
As stated above the bank loan will be 70% of the total cost the total required funding for
the project. 280 Billion Yen in Case A and 350 Billion Yen in case B. The interest rate
will be 13%. In both cases the loan will be paid off in 7 years
¥280𝐴
𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = ∗ 1.13 = ¥45.2𝐴
7
¥350𝐴
𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = ∗ 1.13 = ¥56.5𝐴
7
II. Investment
The remaining 30% of the required funds will be paid by East Japan Railway Company’s
private investor at the beginning of the project. This amount will be ¥120B in Case A and
¥150B in Case B.
Operation costs start in 2020 when the railway is expected to be completed. Projected
operation costs in Case A are ¥150M annually and ¥110M annually in Case B. Assume a
IV. Maintenance
Assuming expected 400 000 additional daily commuters in Case A and 480 000
𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = 400 000 ∗ ¥800 ∗ 365 = ¥116.8𝐴 𝐴𝐴𝐴 𝐴𝐴𝐴𝐴
𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = 480 000 ∗ ¥800 ∗ 365 = 140.16𝐴 𝐴𝐴𝐴 𝐴𝐴𝐴𝐴
Every cash flow at the end of each year will be taken to the net present value at year 0 in order to
Given the data above and any other factors that would affect the success of the project, should
NPV Calculation:
Cash flows during the first 15 years of the project were estimated for net present value analysis.
These cash flows were taken to year 0 and finally cumulative NPVs were calculated for both
projects for consideration when picking which case to proceed with. Note: revenue is only
Case A
NPV= ¥245,627.30 Table SEQ Table \* ARABIC 1
Case B
Table SEQTable
Table1.2
\* ARABIC 2
NPV= ¥280,310.16
Figure 2
Cumulative NPV for both cases during the first 15 years of the project
Based on net present value analysis, both projects will be profitable during the first 15
years of its inception. With proper maintenance, it can be expected that the project will continue
to be profitable during its entire life span. Both cases will start to produce positive net present
value around year 6, the same time that case B becomes more profitable than case A. In both
cases, the project is profitable when taking into consideration the required rate of return. By the
15th year, Case B has a higher NPV of 35 Billion Yen. When taking the NPV analysis into
consideration, it is a better option to implement the high-speed trains. However other risk factors
The financial analysis concluding the execution of high speed rail lines, leads to performing a
technical analysis among the proposals of three a Japanese rail companies namely
1) Keiku corp
2) Seibu corp
3) Hankyu corporation
The analysis considers all the prominent rail components including, rail lines, rail vehicle, signal
control and interlocking systems e.tc. However, the East Japan rail company lays more focus on
subcontracting its project to the company which provides the efficient rail vehicle for the project.
The technical analysis for selecting the suitable subcontractor service involves
testing
b) Comparing the cost and life expectancy of the other rail components manufactured from the
companies
1. Hypothesis Testing
The hypothesis testing was used on the parameter of the vehicle efficiency which was derived
from an empirical relation relating to vehicle energy consumption and vehicle load. The
efficiency was calculated on varying vehicle loads (weight of the vehicle simulating passenger
capacity)
The average vehicle efficiency is considered as 0.75 (tonne/KW-hrs) for the railway project.
Assumed confidence interval is 95%. A trial run of the individual company’s vehicles was
tested under varying loads resulting in the following results (from hypothesis testing) as
shown in table 2.1, table 2.2, table 2.3. T table is used as the number of samples is less than
30.
The Hypothesis testing has lead to filtering Keiku Corp’s proposal prioritising vehicle efficiency
in the rail project. However, the proposal submitted by the other companies have similar vehicle
parameters which requires comparison of the other components of the rail technology which
includes; rail lines, tracking equipment, Signal control systems and other miscellaneous
components like doors, motion sensors etc. The figure 3 depicts the operation cost and life
expectancy of these individual components as quoted in the company’s proposal. It is seen that
Seibu corporation can deliver the optimal service. This can be observed from its low operation
cost and high life expectancy, when comparing with its rival Hankyu corporation
a) The services which might be delivered by Keiku Corporation is screened as it’s high
speed rail vehicle manufactured has low possibility (less than 95 % confidence) of
meeting the vehicle efficiency standards as framed by East Japan railway company for
the project.
b) Comparing the operation cost and life expectancy of the other project components proves
that Seibu Corp has developed the optimal project design which makes them to be
Risks to this project can result from either human actions or natural causes. Table 4 below shows
the potential risks along with their importance estimated by RPN and Criticality formulas. Since
Japan is a peaceful and stable country, the risks of war is low. However, there is a moderate risk
of labour unrest, as labour unions often try to put pressure on the government prior to mega
(2016). As it is typical anywhere in the world, the two major causes of labour unrest are
instability and insufficient legal protection for workers may also result in labour dispute. Migrant
workers from less developed countries may have to be employed due to shortage of manual
Hours not over 8 hours per day or overtime at 1.5 times regular pay
Political Profit sharing with labor union, Agreement between ruling and opposition
Legal Equal treatment of migrant workers, Strict laws to protect labour right
Table 4 also listed three natural disasters. Earthquakes are catastrophic and are un-forecastable
even in this era of technological advancement. Japan is one of the most seismically active
regions on earth. The largest earthquake Japan ever experienced was 9.1 on Richter scale which
struck the east coast of Japan in 2011 (USGS, 2017). Rail tracks are structurally vulnerable to
even moderate tremors, let alone a quake of that magnitude. In this project, therefore, it is
acknowledged that in case of an earthquake, the damage to the rail track is inevitable. So, the
focus is mostly shifted to designing train carriages that are resilient enough to minimize death
and injuries.
Tsunamis are more detectable than earthquakes, due to aerial and marine observations. But their
severity is just as high. It has been, therefore, decided that the railway will be laid out at least 20
Flood is relatively easily forecastable. There is sufficient hydrographic data available for peak
flood level of the rivers that intersect the railway. Statistically, the 100-year-return flood level
has been calculated, and the embankment of the rail track is designed to stand higher than this
value. With respect to the above-mentioned strategies, some additional precautions were
Flood Pumping stations are installed at areas prone to flooding, in this way
References:
● "20 Largest Earthquakes in the World." U.S. Geological Survey. Accessed July 30, 2017.
https://earthquake.usgs.gov/earthquakes/browse/largest-world.php.
● "Average electricity prices around the world: $/kWh." Average electricity prices around the
world: $/kWh | OVO Energy. Accessed July 30,
2017.https://www.ovoenergy.com/guides/energy-guides/average-electricity-prices-kwh.html.
● Druce, Paul. "Reason & Rail." How much does it cost to run a train? January 01, 1970.
Accessed July 30, 2017. http://reasonrail.blogspot.ca/2013/03/how-much-does-it-cost-to-run-
train.html.
● "Tokyo 2020." International Olympic Committee. July 28, 2017. Accessed July 30, 2017.
https://www.olympic.org/tokyo-2020.
● Tokyo's rush hour by the numbers | ELSI. Accessed July 30, 2017.
http://www.elsi.jp/en/blog/2015/11/blog1126.html.
● "Ubiquitous Tokyo subways moving the daily masses | The ..." Accessed July 30, 2017.
http://www.bing.com/cr?IG=A73D2C9ED0034E05A846E0D7BB08DDCC&CID=34AC9F8
F7A626CAD2BE695407B646DE0&rd=1&h=vUf0MkJ1UNR9VQkbE24NewnguaD4tC-
7jdP_rj3APQE&v=1&r=http%3a%2f%2fwww.japantimes.co.jp%2fnews%2f2010%2f08%2f
03%2freference%2fubiquitous-tokyo-subways-moving-the-daily-
masses%2f&p=DevEx,5065.1.
List of Tables
Table 4: RPN and Criticality of potential risks Error! Bookmark not defined.
List of Figures
Figure 2: Cumulative NPV for both the cases during first 15 years of the project 7
Figure 3: Comparison chart for operation cost versus life expectancy Error! Bookmark not defined.