Economic Evaluation of Financial Proposals for Desklib

This article provides an economic evaluation of financial proposals for Desklib, an online library for study material. It includes calculations of NPV, IRR, PB, life cycle cost, equivalent annual cost, consumer surplus, producer surplus, total surplus, and B/C. The article also answers questions related to project recommendations, consumer surplus, opportunity cost, demand elasticity, hyperinflation, oligopoly market, and government subsidies.

Financial Economic
Proposal A Proposal B Proposal A Proposal B
NPV 70,000 77,619 37,000 50,000
IRR 78,076 18,076 88,461 58, 076
PB 2 2 1 2
B/C
Life Cycle Cost 148, 076 95,695 125, 461 108,706
Equivalent Annual Cost 35,000 38,809 18,500 25,000
Consumer Surplus 5000 4166 3333 3333
Producer Surplus 125 208 83 166
Total Surplus 5125 4374 3416 3499
Deadweight Loss Is the cost of any
commodity that
me:
Student #:
49003 ECONOMIC EVALUATION
Assignment # 2 (Spring 2018)
Due: 22 October 2018 (no later than 4pm)
ANSWER-SHEET
Calculations
Ct= 50000
r= 0.25
Financial
Proposal A

Proposal B
Economic
Proposal A
Proposal B
IRR
Financial
Proposal A
Proposal B
Economic
Proposal A

Proposal B
Life cycle cost
LCC= capital cost+ lifetime operation cost+ lifetime maintenance cost
Financial
Proposal
Proposal
Economic
Proposal
Proposal
Equivalent annual cost
But Annuity factor is
= 6
Financial
Proposal
Proposal

Economic
Proposal
Proposal
Consumer surplus
Financial
Proposal
Proposal
Economic
Proposal
Proposal
Producer surplus
Financial
Number of units Price per unit
Proposal
Proposal
Economic
Proposal
Proposal

Please summarize your results in the table below: ( 9 Marks)
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, the investor is encouraged to choose proposal B because its net present value will
be maximum by the end of the project.
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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, the consumer tends to spend more than the producer hence losses will be
encountered
3. Will your recommendation, based on economic perspective, change if the opportunity cost of
money is zero? ( 2 Marks)
Yes No
Why? Because, opportunity cost can never be zero
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, as the prices rise the consumer tends to buy less
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, it erodes the real value of the currency
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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, oligopoly has few sellers unlike monopoly it lies at the opposite side of the
spectrum from percfect market
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)
10/100* 77,619=7,761
77,619+7,761= 85,380

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