Capital Budgeting and Socio-Economic Analysis: Evidence of the New Tramway Project: Ilidža-Hrasnica

Capital budgeting is one of the most important areas of financial management. Different techniques are used to evaluate capital investment budgeting projects: payback period (PP), net present value (NPV) and internal rate of return (IRR). Graham and Harvey (2002) point out that financial managers prefer the following methods: internal rate of return or undiscounted payback period. The Ilidža–Hrasnica tram line extension is one of Sarajevo’s most significant transport investments in decades, aiming to connect a long-neglected suburban corridor to the capital’s tram network. This paper evaluates the project’s viability using capital budgeting criteria, Net Present Value (NPV), and Internal Rate of Return (IRR), alongside a qualitative economic justification. The financial analysis, drawing on projected costs and ridership, suggests a positive NPV and an IRR in the 8–10% range, exceeding the relevant cost of capital, indicating the project is financially justified under reasonable assumptions. The results and discussion emphasize that while initial ridership and financial returns may be modest, even negative in the very early years, strategic planning and supportive policies can ensure the project’s long-run success. The study concludes that the Ilidža–Hrasnica tram line is a sound investment that will enhance the city’s sustainable development, and it recommends measures to maximize its inclusive benefits.