49003 Economic Evaluation Assignment 2022

Name:
Student #:
49003 ECONOMIC EVALUATION
Assignment # 2 (Spring 2019)
Due: 11 October 2019
ANSWER-SHEET
MANDATORY TASK
Please summarize your results in the table below: (9 Marks)
Financial Economic
Proposal A Proposal B Proposal A Proposal B
NPV -$131 mn -$131 mn
IRR 10% 10%
PB 10 years 10 years
B/C 99.7% 99.7%
Life Cycle Cost $79869 mn $51969 mn
Equivalent Annual Cost $8013 mn $5213 mn
Consumer Surplus $49000 mn $40000 mn
Producer Surplus $28000 mn $33600 mn
Total Surplus $77000 mn $73600 mn
Deadweight Loss $2250 mn $3000 mn
Note: NPV; Equivalent Annual Cost; Life Cycle Cost; and Surpluses (Consumer, Producer,
and Total)and Deadweight Loss - must be rounded off to the nearest billion dollars (i.e., no
decimals), and IRR and PB - to the nearest ‘whole’ percents and years (i.e., no decimals), and
B/C - to one decimal point only.
1. Which proposal will you recommend from investor’s perspective? (2 Marks)
A B Either Neither
Why? Because in terms of both financial as well as economic perspective, proposal B is giving
better result.
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2. From a financial perspective, will you select any of these projects on the basis of the indicator of
Consumer Surplus? (2 Marks)
Yes No
Why? Because project B is giving better financial feasibility.
3. Will your recommendation, based on economic perspective, change if the opportunity cost of
money is zero? (2 Marks)
Yes No
Why? Because the cost factor is higher in case of proposal. A.
4. In Figure 2, will the response of demand to changes in prices in the range of 9 to 12 cents per
unit be: (2 Marks)
Elastic Inelastic
Why? Because the changes in price has a big impact on quantity consumptions.
)
5. Will your recommendation, based on economic perspective, change if – due to unanticipated
global financial turmoil – there is hyperinflation after the first ten years of the projects’ life
spans? (2 Marks)
Yes No
Why? Because the difference in economic cost between two proposal is significant.
6. Will your recommendations, based on economic perspective, change if the government succeeds
in converting the monopoly market, into an oligopoly market, but is unable to transform
oligopoly market into a competitive market (i.e., the market stays as an oligopoly for the last 40
years of project life-spans)? (3 Marks)
Yes No
Why? Because the factors like consumer surplus, economic surplus etc will be changed to a great
extent.
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7. How much subsidy (expressed in present value terms) will the government need to provide for
Proposal B in order to encourage the producer to sell electricity at the competitive market prices
throughout the 60 year project duration? (3 Marks)
$ bn
Please, present your calculations? (just two steps)
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9

Apppendix
Economic cost of Proposal A
Proposal A Monopoly
Oligopol
y
Perfect
Competition Total
Consumer Surplus 75000 175000 240000 490000
Producer Surplus 210000 70000 0 280000
Total surplus 285000 245000 240000 770000
Dead-weight loss 17500 5000 0 22500
Economic Cost of Proposal B
Proposal B Monopoly
Oligopol
y
Perfect
Competition Total
Consumer Surplus 80000 140000 180000 400000
Producer Surplus 136000 120000 80000 336000
Total surplus 216000 260000 260000 736000
Dead-weight loss 24000 6000 0 30000
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