As an aide to Governor Blabla, you are given the task of recommending whether th

Question

As an aide to Governor Blabla, you are given the task of recommending whether the state should locate a low-level nuclear waste facility in a rural county. The nuclear industry provides you with a cost-benefit study it has conducted, and it contains the following information: COST-BENEFIT SUMMARY FOR PROPOSED WASTE FACILITY Prepared by the Center for the Objective Study of Nuclear Issues Conclusion: The project will result in net benefits of $3 billion, with a benefit-cost ratio of 13. While these figures, of course, depend on the assumptions of the study, the very large net benefit figure, along with the extraordinarily high benefit-cost ratio, both indicate that the project will remain attractive under most plausible assumptions. We therefore strongly recommend initiating the proposal.

Assumptions:

1. Discount rate of 10%

2. Principal costs: a. Worker exposure b. Risk of accidental exposure during transport c. Reduction to zero of the land value at the storage site d. Construction and maintenance 3. Principal benefits: a. Reduced exposure at current temporary storage sites b. Job creation – 1,000 temporary, 200 permanent jobs c. Extends life of existing nuclear power plants by ten years i. Lower electricity costs for consumers ii. Saves 7,000 jobs d. Increased profits for local service industries

4. Risk assessment: a. Exposure/fatality assumptions from the U.S. Department of Energy b. Probability of fatal exposure due to transport accident: 1/100,000,000 miles (Source: U.S. Department of Energy) c. Value of a statistical life: $1 million

1. Do you believe the report?

2. Find and explain six separate concerns you have with the study

Explanation / Answer

1. Benefit cost ratio compares the present value of an investment decision with the initial cost. Now, the benefit cost ratio for this nuclear waste facility project is a very high number of 13, making it hard to believe the report. Usually, the benefit cost ratio for large infrastructure projects are not so high. This unusually high ratio, does not make me believe in the report.

2. Six concerns are:

(i) Firstly, there is no mention of inflation. Inflation will decrease the purchasing power on one hand and increase the costs on the other hand. My concern is that whether the real cash flows have been converted into nominal cash flows, using the nominal discount rate?

(ii) My second concern is regarding the calculation of the discount rate of 10%. How was this discount rate calculated or determined? There is no mention of the debt and equity being used for this project. So, my concern is - Is the discount rate appropriate?

(iii) Are all relevant social costs have been taken into consideration? Has the community wide cost from the rural county's perspective been included?

(iv) How have the intangible benefits and costs like worker exposure, risk of accidental exposure, etc been quantified? What was the basis?

(v) Has the changes in net working capital required for the project been included in the quantitative analysis?

(vi) Before doing the benefit cost analysis, was the opportunity cost of this project determined?

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.