a. Do a formal cost-benefit analysis using the quantifiable factors previously l
ID: 1193883 • Letter: A
Question
a. Do a formal cost-benefit analysis using the quantifiable factors previously listed. Assume that the lifespan of the dam is 30 years. As in the example in Table 6.5 , assume that construction begins now (in Year 0). All other impacts start once the dam is completed (in Year 3) and continue for 30 years (until Year 32). Refer to Appendix 6.2 to make the necessary calculations using Excel. For costs C i or benefits B i that extend into the indefinite future, use the formulae PV [ C ] = C i / r or PV [ B ] = B i / r to obtain the value of the (infinite) stream of benefits. You may assume that the dam will operate for the foreseeable future. Do a complete cost/benefit analysis for two possible interest rates: 10 percent and 5 percent. Do your figures indicate a definite “yes,” definite “no,” or uncertain result in each case?
b. Now consider an alternative project: a number of smaller dams constructed so as not to flood significant agricultural or forest lands. For this project, total construction costs are exactly half the costs of the big dam project, and power/irrigation benefits are also half as much. But there is no damage to farmland or forest, and there are no ecological or resettlement costs. Evaluate this project, and compare it to the larger project at the two interest rates.
Annual Present Value of Costs and Benefits of Dam Construction Proposal (in Millions), Selected Years Costs Benefits Construction Operations Environmental Dam Failure Recreation Hydropower Flood Control Total Present value 8.28 82.79 The present value of all benefits is: PVbenefits= 248.38 + 82.79 + 149.03 Cell ES from 0.03 to 0.05. All calculations will automatically update The new total present value should be $226,072 instead of $280.469 SES2/(+SESS)AA5) Now the references to Cells E2 and ES are fixed, and only the reference to Cell A5 will adjust when the fomula is copied. The value in Cell B5 should still be 18,303. If we copy this revised formula to Cell B6, the new value should be 17,770. The formula is KEY TERMS AND CONCEPTS FOR APPENDIX 6.1 AND APPENDIX 6.2 non-response bias protest bids range bias referendum format strategic bias Cell B6 should be SES2/(+SESS)A46) So we are now discounting by four years instead of three. We can then copy this formula down to all the remaining years. With each additional line down we are discounting by an additional year. The value for the last year should be 10.438. Summing over all the years (Excel has a simple summation command). we get a total present NOTES FOR APPENDIX 6.2 value of $280.469, as shown in Cell B27 1. See Roach et al, 2002, for a study that found range bias with the With the input variables on the side, we can easily revise our analysis. Suppose that we want to redo our calculations with a 5 percent discount rate. All we would need to do is change the value in 2. Seefor example. Marta-Pedroso et al., 2007They conducted a CV survey using both in-person and Intemet fonnats. While they obtained a response rate of 84 percent for in-person contacts, the response rate for the s Exit Environmental and Natural Resource Economics, A Contemporary Approach - Jonathan M. Harris, Brian Roach 13.222 The = is necessary to indicate you are entering a formula. Entering E2 tells Excel to use the value in Cell E2 (20,000) as the numerator of the equation. The denominator refers to the cells with the discount rate and the year. When you enter this formula. you should get a value of 18,303 12837 12,100 11406 Next copy the formula from Cell B5 to Cell B6, to obtain the present value for Year 4. You should get a value of 0-obviously not correct. If you look at the copied formula (click on Cell B6). you will see that every cell reference has been shifted down by one line. The copied formula should read 20 23 10.435 TOTAL PV For Year 3 the present value of the benefit is: PV = $20,000 / (1 + 0.03)3 while we wanted to refer to Cel A6 instead of Cell A5 (Year 4 instead of Year 3). we wanted to maintain the references to Cells E2 and E5 To do this in Excel, when we enter a formula we place- before the column and the row to fix a reference to a specific cell. Then whenever the formula is copied, the reference won't change. To perform this caleulation in Excel, we would enter the following exactly into Cell B5 =E2 / ((1+ES-AS). Go back to the formula in Cell B5 and revise it as follows 161-162/584 Retun to page 152 administer. As discussed in the chapter, the NOAA panel recommended in-person surveys because they allow the CV scenario to be presented in the greatest detail. Table A6.1 Using Excel to Perform Present Value Calculations APPENDIN 6.2: USING EXCEL TO PERFORM PRESENT VALUE 20.000 CALCULATIONS Present value calculations for analyses that cover many years can be performed easily using Microsoft Excel. Let's assume that we want to calculate the present value of a $20,000 annual benefit that occurs over a twenty-year period starting in Year 3 (relative to now, which is Year 0). The discount rate is 3 percent 18.303 17.770 17.252 16.750 16.262 15.788 We would first set up a column in our spreadsheet for the years, shown as Column A in Table A6.1. The benefit will occur for twenty years starting in Year 3, so the numbers go up to 22. Note that the benefits for Years 0-2 are zero. We entered the annual benefit of $20,000 in Cell E2 and the discount rate in Cell ES. Entering these on the side will allow us to change these values easily if we want to consider a different scenario, such as a different discount rate 14.882 14.448 14,028 12Explanation / Answer
It is a decision on long term investment. Government is going to invest money in the construction of a dam. Associated costs and benefits are as follows:
Costs:
1. Construction cost of $500 million per year for period 0,1 and 2.
2. Operating cost of $50 million per year starting from 3rd to 32nd year.
3. Loss of agriculture from flood of $45 million per year from year 3 to year 32.
4. Loss of forest resources of $20 million per year from year 3 to 32nd year.
Benefits include:
1. Hydro electric power generation. 3 billion kilowatt hour of power is generated per year. Since 1 billion is equal to 1,000 million yearly power generation is 3,000 million kilowatt. Sale value per kilowatt is $0.05. So benefit per year is 3,000 x 0.05 =$150 million
2. Water is avaialable per year for irrigation. It is 5 billion gallon or 5,000 million gallon. benefit per gallon is $0.02. Thus yearly benefit is 53,000 x $0.02 =$100 million.
Considering all these costs and benefits a table of absolute costs and benefits can be prepared.
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On the basis of above absolute data understated present value of costs and benefits are prepared. Here discounting rate is 10%. First present value of $1 receivable in n years have been calculated. Then these figures are multiplied with absolute cash cost and cash benefits figures, finally present values are totalled up. The table is as follows:
Result: The figures of the table shows that present value of lifetime total cost is 2,263.72 million dollar. Further lifetime present value of benefits is $1947.71 million. Since benefit is less than cost the project should not be accepted.
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Now consider discounting interest rate of 5% and do the same calculations again. Results will indicate that position will improve but still costs will be more than benefits.loare shown in the table below:
Answer: Now present value of lifetime costs is $3,033.18 million and present value of lifetime benefits is $3,485.82 million. As the benefit is more than cost. Project is now accepted.
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Answer of part b:
Now the government has decided to construct many smaller dam so that flood losses of agricultural and forestry can be avoided. It will reduce 50% of construction cost. Also benefits of power generation and water supply facilities will be half. But losses from flood will not exist. Thus cost structure in absolute term is now:
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Note that construction cost now has dropped from $500 million to $250 million.ther there is no loss from flood. also benefits of hydroelectric generation and water supply for irrigatios are reduced to 50%. Now use 10% rate and calculate prresent value. Result is shown below:
Result: Now total present value of lifetime cost is only $1,073.43 million. But present value of lifetime benefits is well below it at $447.93 million. So project should not be accepted.
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Finally calculate present value using 5% discounting rate. It is shown below:
Result: Now total present value of cost is $1,412.02 million. Benefit is lower. It is now $801.738 million. So donot accept the project.
Now compare previous big gdam project with smaller dam project. Big dam project is better than smaller dams. The bigger project is acceptable if discounting interest is 5%.
Statement showing present value of costs and benefits (Figures in million $) Discount Present value of costs Present value of benefits Time Factor Hydro Irrigation Construction Operating Loss (ag) Loss (for) Total Power Water Total 0 1 500 500 0 1 0.90909 454.5454545 454.545 0 2 0.82645 413.2231405 413.223 0 3 0.75131 0 37.5657 33.8092 15.0263 86.4012 112.697 75.1315 187.829 4 0.68301 0 34.1507 30.7356 13.6603 78.5465 102.452 68.3013 170.753 5 0.62092 0 31.0461 27.9415 12.4184 71.406 93.1382 62.0921 155.23 6 0.56447 0 28.2237 25.4013 11.2895 64.9145 84.6711 56.4474 141.118 7 0.51316 0 25.6579 23.0921 10.2632 59.0132 76.9737 51.3158 128.29 8 0.46651 0 23.3254 20.9928 9.33015 53.6483 69.9761 46.6507 116.627 9 0.4241 0 21.2049 19.0844 8.48195 48.7712 63.6146 42.4098 106.024 10 0.38554 0 19.2772 17.3494 7.71087 44.3375 57.8315 38.5543 96.3858 11 0.35049 0 17.5247 15.7722 7.00988 40.3068 52.5741 35.0494 87.6235 12 0.31863 0 15.9315 14.3384 6.37262 36.6425 47.7946 31.8631 79.6577 13 0.28966 0 14.4832 13.0349 5.79329 33.3114 43.4497 28.9664 72.4161 14 0.26333 0 13.1666 11.8499 5.26663 30.2831 39.4997 26.3331 65.8328 15 0.23939 0 11.9696 10.7726 4.78784 27.5301 35.9088 23.9392 59.848 16 0.21763 0 10.8815 9.79331 4.35258 25.0274 32.6444 21.7629 54.4073 17 0.19784 0 9.89223 8.90301 3.95689 22.7521 29.6767 19.7845 49.4612 18 0.17986 0 8.99294 8.09365 3.59718 20.6838 26.9788 17.9859 44.9647 19 0.16351 0 8.1754 7.35786 3.27016 18.8034 24.5262 16.3508 40.877 20 0.14864 0 7.43218 6.68896 2.97287 17.094 22.2965 14.8644 37.1609 21 0.13513 0 6.75653 6.08088 2.70261 15.54 20.2696 13.5131 33.7826 22 0.12285 0 6.1423 5.52807 2.45692 14.1273 18.4269 12.2846 30.7115 23 0.11168 0 5.58391 5.02552 2.23356 12.843 16.7517 11.1678 27.9195 24 0.10153 0 5.07628 4.56865 2.03051 11.6754 15.2288 10.1526 25.3814 25 0.0923 0 4.6148 4.15332 1.84592 10.614 13.8444 9.2296 23.074 26 0.08391 0 4.19527 3.77575 1.67811 9.64913 12.5858 8.39055 20.9764 27 0.07628 0 3.81388 3.4325 1.52555 8.77193 11.4417 7.62777 19.0694 28 0.06934 0 3.46717 3.12045 1.38687 7.97449 10.4015 6.93433 17.3358 29 0.06304 0 3.15197 2.83677 1.26079 7.24953 9.45591 6.30394 15.7599 30 0.05731 0 2.86543 2.57888 1.14617 6.59048 8.59628 5.73086 14.3271 31 0.0521 0 2.60493 2.34444 1.04197 5.99135 7.8148 5.20987 13.0247 32 0.04736 0 2.36812 2.13131 0.94725 5.44668 7.10437 4.73624 11.8406 Total 350.588 155.817 2263.72 1168.63 779.084 1947.71Related Questions
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