Cost-benefit Analysis and the Environment - Assignment Example

Economics NPV Analysis Name Institution Course Lecturer Date Cash flows for options 1 and 2 Year Activity Cost per year (option 1) Benefits (option 1) Cost per year (option 2) Benefits (option2) 0 land purchase 5,000,000 6,250,000 Planning 250000 312,500 5,250,000 6,562,500 1 Clearing 750000 937500 Grounds work 2,500,000 3,125,000 Wages 11406900 12,910,900 14,656,900 16,973,400 2 building materials 3750000 4,687,500 Wages 11520969 13,040,009 15,270,969 17,727,509 3 plant rental 900,000 1,125,000 Wages 11636178.69 13,170,409.09 12,536,178.69 14,295,409.09 4 costs due to the lost park 2916000 ongoing maintainance cost 250,000 300,000 benefits due to time saving 1,731,000 1,731,000 benefits due to reduced accidents 5,695,500 3,170,000 3,166,000 7,426,500 4,901,000 5 costs due to the lost park 2916000 ongoing maintainance cost 253,750 304500 benefits due to time saving 1,731,000 1,731,000 benefits due to reduced accidents 5,695,500 5,695,500 3,169,750 7,426,500 7,426,500 6 Costs due to the lost park 2916000 Ongoing maintainance cost 257,556 309067.5 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,173,556 7,426,500 7,426,500 7 Costs due to the lost park 2916000 Ongoing maintainance cost 263,341 313,703.5 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,179,341 7,426,500 7,426,500 8 Costs due to the lost park 2916000 Ongoing maintainance cost 269,321 318,409.1 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,185,321 7,426,500 7,426,500 9 Costs due to the lost park 2916000 Ongoing maintainance cost 273,361 323,185.2 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,189,361 7,426,500 7,426,500 10 Costs due to the lost park 2916000 Ongoing maintainance cost 277,461 328,033 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,193,461 7,426,500 7,426,500 11 Costs due to the lost park 2916000 Ongoing maintainance cost 281,623 332,953 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,197,623 7,426,500 7,426,500 12 Costs due to the lost park 2916000 Ongoing maintainance cost 285,847 337,948 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,201,847 7,426,500 7,426,500 13 Costs due to the lost park 2916000 Ongoing maintainance cost 290,135 343,017 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,206,135 7,426,500 7,426,500 14 Costs due to the lost park 2916000 Ongoing maintainance cost 294,487 348,162 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,210,487 7,426,500 3,210,487 7,426,500 15 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 298,905 298,905 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,214,905 7,426,500 3,214,905 7,426,500 16 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 303,388 303,388 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,219,388 7,426,500 3,219,388 7,426,500 17 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 307,939 307,939 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,166,000 7,426,500 3,166,000 7,426,500 18 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 312,558 312,558 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,166,000 7,426,500 3,166,000 7,426,500 19 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 328,186 328,186 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,244,186 7,426,500 3,244,186 7,426,500 20 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 333,109 333,109 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,249,109 7,426,500 3,249,109 7,426,500 21 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 338,105 338,105 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,254,105 7,426,500 3,254,105 7,426,500 22 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 343,177 343,177 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,259,177 7,426,500 3,259,177 7,426,500 23 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 348,325 348,325 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,264,325 7,426,500 3,264,325 7,426,500 24 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 353,549 353,549 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 32,669,549 7,426,500 32,669,549 7,426,500 25 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 358,853 358,853 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,274,853 7,426,500 3,274,853 7,426,500 26 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 364,235 364,235 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,280,235 7,426,500 3,280,235 7,426,500 27 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 369,699 369,699 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,285,699 7,426,500 3,285,699 7,426,500 28 Costs due to the lost park 2916000 2916000 Ongoing maintainance cost 375,244 375,244 Benefits due to time saving 1,731,000 1,731,000 Benefits due to reduced accidents 5,695,500 5,695,500 3,291,244 7,426,500 3,291,244 7,426,500 Note; PV has been calculated by discounting the difference between the benefits and the costs with the given rate of 3% for the cash flows provided above starting from year 4. While the initial cost is assumed to have been accrued over the first 3 years of constructing the roads. Hence, the initial cost is calculated by discounting the costs incurred from year 0 to year 3 using a 3% social discount rate. Question 1 NPV for option 1 Social discount rate = 3% NPV = Σ [CF ÷ (1+ r)t ] NPV = PV- Initial cost PV = $67,112,119.34 Initial cost = 45,346,733 NPV = $ 67,112,119 – 45,346,733 = 21,765,386. NPV for option 2 NPV = PV – Initial cost PV = 68,717,118 Initial cost = 52,833,731 NPV = 68717118 - 52833731 = 15,883,387 BCR for option 1 Benefit cost ratio = present value (PV) ÷ initial cost of a project PV = $67,112,119.34 Initial cost = 45,346,733 BCR = $ 67,112,119 ÷ 45,346,733 = 1.48 NBCR = (1.48 – 1) x 100 = 48% BCR for option 2 BCR = PV – Initial cost PV = 68,717,118 Initial cost = 52,833,731 BCR = 68717118 ÷ 52833731 = 1.30 NBCR = (1.30 – 1) x 100 = 30% Question 2 Looking at the results obtain from the NPV calculation; option 1 = 21,765,386 and option 2 = 15,883,387, option 1 would be preferred to option 2, this is because it has a higher NPV indicating that it would generate more benefits to the community. Moreover using the BCR results still option 1 would be preferred to option 2 because it has a higher present value to initial cost ratio, implying that option 1 would generate more benefits than the costs it incurs. Question 3 Total loss in asset value due to option 1 $300,000 - $250,000 = $50,000 (this loss will be experienced by 150 houses in all the years) Therefore, total loss = 150 x $50000 = $7500,000 Discounting this loss at a social cost rate of 3% over the 28 years; = (7500,000 ÷ 1.0328) = 3,278,076 Total loss in asset value of the 500 houses in option 2 $50,000 x 500 = 2500,000 (2500,000 ÷ 1.0328) NPV after 28 years = 1,092,692 The pollution resulting from the second option is lower than that which results from the first option however adding the two effects to their respective initial NPVs above option 1 still remains to be the preferred option over the second one. Question 4 Conducting a sensitivity analysis on different variable in the construction of the two roads the outcomes show that any variable thatincreases the social costs that result from the negative effects of the road construction in the area greatly affects outcomes. Therefore variable such as cost accruing from the pollution caused by the vehicles using the new roads heavily affects the outcomes negatively.(Sassone, P. G., & Schaffer, W. A. (1978). Question 5 The analysis fails to address the effects that the project may have to the value of such assets as the land and the accessibility of the resources in the area. It doesn’t also show the benefit of improved living standards of the dwellers of the area where the road is to be constructed. In addition the benefits accruing the government for example taxes levied on the road users are also not address. Moreover the analysis conducted to evaluate the best option to go for may also have some limitations of such as; the cost of the social benefits may not be very clear in that the criteria used to give social benefits monetary value would not necessarily be precise. These may lead to poor or wrong judgement as far as the choice of projects is concerned. In addition, the choice made for the discounting rate may also not be the best thus leading to exaggerated result. This is because the value decreases as the cashflows increases, hence with as many cashflows as the ones included in this analysis it is possible to get a forced answer. (Hanley, & Spash, 1993). References Hanley, N., & Spash, C. L. (1993). Cost-benefit analysis and the environment (pp. 1-8). Cheltenham: Edward Elgar. Sassone, P. G., & Schaffer, W. A. (1978). Cost-benefit analysis: A handbook (Vol. 182). New York: Academic Press. Read More