QN 3:
A local authority is planning to expand its provision of schools in its local community. Whilst the
local authority has decided that PPP should not be used to procure these facilities, it still aims
to take a loan to fund the design and build cost of the project. The annual budget the local
authority has available to support the servicing and repayment of this loan, the life cycle
cost (repairs), the facilities management costs (management, utility, and maintenance) and the final
demolition cost is $2 Million.
The following information is given to you to offer advice on the target construction cost that needs
to be provided to potential bidders.
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Duration of design and build (D&B) 1 year
Life of school 25 years
Life Cycle and facilities management cost 10% of D&B cost per year
Demolition cost at the end of the school’s life $1M
a) Assuming a borrowing interest rate of 9% and that the loan is to be fully paid back by the end of the
school’s life, calculate the target design and build cost that should be provided to potential bidders.
You may ignore the effect of inflation in this question. (12 marks)
b) When the tenders for the projects were received, it was found that the lowest bidder submitted a
tender for £10.2 Million. Given the annual budget noted above, can the local authority pay back all
of the loans associated before 35 years? You may assume that the life cycle and facilities
management costs are now 10% of tendered value.(8 marks)