Regional Authority: Cost Benefit Analysis of Hydropower Plant Project

This report presents a comprehensive cost-benefit analysis (CBA) of a proposed hydropower plant scheme for a regional authority. The analysis compares two proposals: one involving a larger dam and relocation of residents, and another involving a smaller dam. It considers initial investment costs, including land acquisition, relocation expenses, and opportunity costs from lost agricultural production. The benefits analyzed include electricity generation, potential employment opportunities, and environmental considerations. The report calculates the net present value (NPV) and internal rate of return (IRR) for both proposals, providing a comparative analysis under different discount rates. The findings conclude that the first proposal, despite higher initial costs, offers a greater net benefit and is recommended for implementation, highlighting its potential for economic and social development. References and bibliography are also included.

Running head: ENVIRONMENTAL ECONOMICS
Environmental Economics
Name of the Student:
Name of the University:
Author’s Note:

1ENVIRONMENTAL ECONOMICS
Executive Summary:
This report is prepared to analyze and understand the capital budgeting techniques and to apply
is for a real life case study. In this report a detailed cost benefit analysis have been presented for
a proposal of a hydropower plant, which will cause some opportunity loss. The construction of
the plant requires a huge amount of capital investment and it will cause an opportunity cost for
the existing agricultural produces. In this report, all the proposed costs for the construction of the
plant and the buildings have been considered and all the benefits arising from such investments
have been analyzed and presented comparatively.

2ENVIRONMENTAL ECONOMICS
Table of Contents
Introduction:....................................................................................................................................3
Proposal 1:.......................................................................................................................................3
Proposal 2:.......................................................................................................................................5
Comparative analysis of the two proposals:....................................................................................6
Conclusion and recommendation:...................................................................................................7
References and bibliography:..........................................................................................................8

3ENVIRONMENTAL ECONOMICS
Introduction:
Investment in capital assets requires huge amount fund outflow and associated costs.
Therefore, before accepting any investment proposal, a detailed cost and benefits analysis must
be done. In this analysis, costs mean the capital costs or the initial investment, annual
maintenance costs as well as the opportunity cost of the proposal. In this report, the case study of
a construction proposal of a hydro power plant by a regional authority have been analyzed and
compared with benefits arising for such proposal. To make such a cost and benefit analysis
meaningful, the benefits arising from such investment are discounted by a suitable rate and
compared with the initial investment to find out the net present value of the investment proposal.
It can further be analyzed with the help of internal rate or return. In the following parts of this
report, the NPV and IRR of the proposals have been computed and present in the form of Cost
Benefit Analysis (Chandra 2017).
Proposal 1:
In proposal, it has been proposed that, the construction of the hydro plan will cause a
flood in a major area and citizens of the area need to be relocated to some other place. Therefore,
the costs of such relocation along with the cost of land for such housing have been considered. It
is also a fact that, if the proposal is accepted then the present agricultural products could not be
produced there, hence, the sales prices of the agricultural products have been considered as the
opportunity costs for the proposal. For such analysis, the risk free rate of 7.5% has been
considered as the discount rate. Considering all those assumptions, the analysis can be presented
as below.

4ENVIRONMENTAL ECONOMICS
It can be observed from the above analysis that, it the first proposal of construction of the
hydro power plant is adopted and the expected benefits can be generated from the investment,
then the proposal can have a net present value of $993.94 million. Therefore, as it is having a
positive and a significant amount of net present, the proposal can be accepted. If the proposal can
be accepted and executed, then there would be monetary as well as some economic benefits. It
can be observed from the case study, that there is an 11% unemployment rate. Therefore, if the
plant is constructed, then for construction of the plant a huge employment could be created as
well as for continuous operation of the plant a huge labor is required which in turn will be
creating a huge employment opportunity for the local citizens (Chandra 2017). It can further be
observed from the case study that, there will be a fishery in addition to the hydro plan, which will
be producing fishes for the local citizens. As the hydro plant uses water for electricity generation,
it is completely environment friendly, and produces no pollution. These are the benefits, which
can be generated by accepting and implementing the first proposal. In this proposal, as it is
assumed that a major area of land near the hydro plan would be flooded, the cost of housing and

5ENVIRONMENTAL ECONOMICS
relocation of the citizens to some other places increases the initial investment for the first
proposal.
In the above analysis, the net present value has been computed for first 10 years only, if
the annual net cash inflow of the tenth year is expected to be generated constantly beyond the 10
year horizon, the net present value can be computed as the annual cash flow divided by the
discount rate (Chandra 2017). Applying such method, the net present value can be computed to
$2508.28 million. Therefore, in longer-term analysis also, the net present value of the proposal is
positive and significant, hence, it can be suggested that the proposal can be accepted.
Proposal 2:
There is another proposal of construction of a smaller hydro power plant, which is much
smaller in comparison to the hydro plant as proposed in the first proposal. As this plant is
relatively small, it is expected that there would be no flood in areas near the plant. Therefore, in
the second proposal no housing and relocation cost is considered. It is also stated that, in the
second proposal, the fishery could not be made as is constructed in relatively less area; hence, no
benefits from the fishery have been considered. As the plant would be relatively smaller than the
first proposed hydro plan, it is assumed that the expenses for construction as well as the
operating and maintenance costs will be lower. On the other hand, the power generation will also
be less. Considering all those conditions, costs of construction of the hydro power plant and the
benefits arising from it, the net present value and the internal rate return can be computed for
appraisal of the proposal as follows.

6ENVIRONMENTAL ECONOMICS
It can be observed from the above analysis, that there is a positive and significant amount
of net present value for the second proposal. Considering all those revised initial investment and
the revised incomes arising from the investment, it can be observed that the second proposal can
have a net present value of $902.17 million. In terms of NPV, this proposal can also generate a
positive and a significant amount of net present value. Therefore, in term of net present value this
proposal can also be accepted.
Comparative analysis of the two proposals:
It can be observed from the above analysis that, the first proposal is having more net
present value than the second proposal. The first proposal is having a net present value of
$993.94 million while the second proposal is having a net present value of $900.31 million.
Therefore, the first proposal is having more net present value than the second proposal. On the
other hand, if a different discount rate were considered, then the net present value would be
different for both the proposals. In the following table, net present values of both the proposal
against different discount rate have been presented.
Discount Rate 10% 12% 14% 16% 18% 20%
NPV of
Proposal 1
$
1,076,715,194
$
1,126,854,654
$
1,165,512,420
$
1,194,757,755
$
1,216,269,705
$
1,231,416,195
NPV of
Proposal 2
$
912,162,744
$
254,053,701
$
350,994,546
$
308,221,210
$
270,465,998
$
235,978,198

7ENVIRONMENTAL ECONOMICS
From the above table it can be observed that, in most of the cases in different discount
rates, the net present value for the first proposal is more than the net present value of the second
proposal.
Conclusion and recommendation:
From the above analysis and discussion, it can be concluded that, the first proposal for
construction of the hydro plant is having more net benefits than the second proposal of
construction of relatively small hydro plant. In other aspects also, the first proposal is having
more economic benefits than the second proposal. It can generate more benefits and can create
employment opportunity for the local citizens. As the plant is a hydro plant, it is environment
friendly and can help in improvement of the society as a whole. Therefore, it can be
recommended for the regional authority to go for the first proposal.

8ENVIRONMENTAL ECONOMICS
References and bibliography:
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finance (Vol. 324). John Wiley & Sons.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Runkle, D.E. and Anson, M.J., 2015. Quantitative
investment analysis. John Wiley & Sons.
Dong, H., Dai, H., Dong, L., Fujita, T., Geng, Y., Klimont, Z., Inoue, T., Bunya, S., Fujii, M. and
Masui, T., 2015. Pursuing air pollutant co-benefits of CO2 mitigation in China: A provincial
leveled analysis. Applied energy, 144, pp.165-174.
Fudholi, A., Sopian, K., Ruslan, M.H. and Othman, M.Y., 2013. Performance and cost benefits
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Pearce, D.W., 2016. Cost-benefit analysis. Macmillan International Higher Education.
Peterson, G., 2019. Valuation of wildland resource benefits. Routledge.