Economic Evaluation Assignment

Name:
Student #:
49003 ECONOMIC EVALUATION
Project# 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 $3,855,492,108 $-131,370,811 $1,836,432,471,060 $2,442,914,556,575
IRR 1% -3% 468% 573%
PB 1.09 0.99 46.91 62
B/C (Benefit cost
ratio)
0.09 0.99 45.91 62.07
Life Cycle Cost $79,868,629,189 $51,960,588,757 $2,497,785,757,570 $691,031,668,268.927
Equivalent Annual
Cost
$386819631 $-13180369.02 $188,261,548,916.22 $245,096,418,540.99
Consumer Surplus $5 $7 $175000 $126000
Producer Surplus $70000 $21600 $175000 $108000
Total Surplus $70005 $216007 $234000 $234000
Deadweight Loss 5000 4000 -5000 -4000
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.
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1. Which proposal will you recommend from investor’s perspective? (2 Marks)
A B Either Neither
Proposal A will be selected from investment perspective because its NPV, IRR and profitability
index ratio is higher then other one .
______________________________________________________
_______________________________________________
(no more than 10 words)
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
Yes, because project A economically generating good amount of saving for people.
____________________________________________________ (no more than 10 words)
3. Will your recommendation, based on economic perspective, change if the opportunity cost of
money is zero? (2 Marks)
Yes No
No, because opportunity cost is zero then it means that if investment is done on project A benefit
will not lost in another project. Zero opportunity cost make decision to pick project A firmer.
_____________________________________________________________
____________________________________________________ (no more than 10 words)
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
Demand is elastic because with change in price demand also get changed.
____________________________________________________ (no more than 10 words)
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)
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Yes No
No, because IRR of project B is already high, if inflation increase it will then also will be viable.
____________________________________________________ (no more than 10 words)
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
No because if market will remain in oligopoly state then it means that there will be less
competitors. Hence, profit earning capacity of project will increase.
_____________________________________________________________
____________________________________________________ (no more than 10 words)
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)
1221457278287.5*8%
=$97,716,582,263.00
Median interest rate of 8% is used to compute subsidy amount.
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OPTIONAL TASK
1. What was the main controversy in the evaluation of Gordon-below-Franklin proposal?
Main controversy was that there were few people who want to see development of south west
Australia. In order to boost development in mentioned area hydroelectricity project was
proposed to be build but environment protectionist were not in favour of proposal.
2. Why did this controversy arise?
Controversy arise because development of dam will lead to destruction of forest area which was
rich in minerals. Hence, environment protectionist come on road.
3. How was this controversy resolved?
On 5 march 1983 Bob Hawke won election and promise that he will make effort to stop dam
project. His government pass regulations under national parks and wildlife conservation act 1975
and then pass world heritage properties conservation act 1983 which completely prohibit
excavation activity around Franklin river.
4. What ‘substantive insights’ did you gain from reviewing this case study?
Before starting work at any place which is covered by natural resources social cost benefit
analysis must be done so as to avoid capital blockage in these areas due to protest done by
environment protectionist.
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