Sunday, March 20, 2011

Volume 3 Issue 11: Intelligent Investing

Return on Investments (some thoughts)

Today from the Star:

Penang Hill funicular trains to attract more tourists
GEORGE TOWN: Trips up Penang Hill by the upgraded funicular train service will be as fast as five minutes or less in air-conditioned coaches but the public will only experience that in a month when the service resumes.
Tourism Minister Datuk Seri Dr Ng Yen Yen said the faster speed and new coaches that can accommodate 100 passengers each would enable 2.4 million tourists to visit the hill annually compared to 607,198 in 2009.
She said the hill received 65,176 visitors in the first two months of last year before the service was halted for the ministry’s RM73mil-upgrade.
“With the new and faster system, we expect there will be an influx of local and foreign tourists,” she said after handing over the project to the Penang Hill Corporation (PHC) on Saturday.
She said the project was in line with the ministry’s aim to build more parks and gardens.
“Penang Hill is a unique place for botany enthusiasts who love nature. I hope PHC will fully utilise its potential and make Penang Hill an icon in the state,” she said.
Chief Minister Lim Guan Eng, who is the head of PHC’s board of directors, said they would make an announcement in a month’s time on when the train service would be reopened to the public.
“We need to sort out several matters after we take over the project,” he said.
Prior to the upgrading, it took 30 minutes to go up the hill on the funicular service with a change of train in the middle station.
No change of train is required in the upgraded service.
Here are some simple calculations about how ridiculous some of the calculations are.

The Tourism Minister believes that the number of visitors to Penang Hill will jump to 2.4 million. I suppose you can't really find any fault with her because she did not say by when. Let us estimate when that will happen with some back-of-the-envelope calculation. Assuming a 25% growth per annum, it would take a little bit more than SEVEN years for the number of visitors to reach 2.4 million per annum.

So is the investment worth it? First of all, RM73 million sounds pretty steep to begin with. Let us now estimate how long it would take for the investment to recoup itself. Based on the current ridership and a 25% annual growth as before, with the ticket priced at RM8, which is double the current ticket price, it would also take SEVEN years to break even. Now, assuming that the ticket price did not double, and perhaps raised to RM6, it would take a bit more than EIGHT years to break even.

This is not even including all the operating costs, which includes maintenance, spare parts, etc. Should they have invested in this upgrade? Probably. But should it cost RM73 million? Could we have cut the cost to a much smaller amount? I sure hope so.

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