Hydro Project Economic Analysis and Surpluses

The assignment content discusses the calculation of economic indicators for a hydroelectric project. The indicators include NPV, IRR, benefit-to-cost ratio, equivalent annual cost, and producer surplus in monopoly, oligopoly, and competitive markets. The results show that the total consumer surplus is highest in the competitive market ($2.01378E+11), followed by the oligopoly market ($8.18586E+11). In contrast, the monopoly market has the lowest total consumer surplus ($1.20781E+12). Similarly, the total producer surplus is highest in the competitive market ($2.01378E+11) and lowest in the monopoly market ($2.41563E+12). The total surplus for all three markets is $5.66337E+12.

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49003
ECONOMIC
EVALUATION
ANSWER-SHEET

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Please summarize your results in the table below: (5 Marks)
Financial Economic
Proposal A Proposal B Proposal A Proposal B
NPV -3.66 13 billion
IRR 10% 27%
PB 60 Years 1 year
B/C -19.30 675
Life Cycle Cost 40 billion 40 billion
Equivalent Annual Cost 3 billion 3 billion
Consumer Surplus 1.48 billion 2.22 billion
Producer Surplus 2.29 billion 3.43 billion
Total Surplus 3.77 billion 5.65
Deadweight Loss
Notes:
1. 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.
2. All boxes in the table must be filled (if a particular indicator is not relevant, you may write
‘Not Applicable’ in the box).

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1. What is the basis of your calculations (the results of which are presented in the above table) –
Nominal terms or Real terms? (2 Marks)
Nominal prices Real prices
Why? Real value is taken in to account because inflation rate is taken in to account for
discounting cash flows.
(no more than 10 words)
2. Which proposal will you recommend from the investor’s perspective? (2 Marks)
A B Either Neither
Why? Because Proposal B because its NPV and IRR are higher than project A and due to this
reason it is considered economic viable.
(no more than 10 words)
3. Which proposal will you recommend from the producer’s perspective? (2 Marks)

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A B Either Neither
Why? Because From the producer perspective project B is selected because it have high value
of surplus amount in comparison to project A.
(no more than 10 words)
4. Will your recommendation, based on financial perspective, change if there is no inflation or
deflation throughout the useful economic lives of the two projects? (2 Marks)
Yes No
Why? Because No, because in the project A already cost is much higher than cash inflows.
Thus, even adjustment will not be done then also project B will be proved viable.
(no more than 10 words)

No
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5. Will your recommendation, based on economic perspective, change if the opportunity cost of
money is infinite? (2 Marks)
Yes No
Why? Because Yes, if opportunity cost of money is infinite then there is probability that
recommendation may change because opportunity cost in respect to project depends on the way in
which it is used by entity.
(no more than 10 words)
6. Will your recommendation from a financial perspective change if the money for building the
project (i.e., capital cost) is obtained as a ‘grant’ (i.e., money that has not to be paid back) rather
than a ‘loan’ (i.e., money that has to be paid back)? (2 Marks)
Yes No
Why? Because No because even firm do not need to pay money back it have to bear operational
cost which will be deducted from cash flows. In that condition also project A will not prove
profitable.
(no more than 10 words)
7. In Figure 1, will the response of demand to changes in prices in the range of 4 to 6 cents per unit
be: (2 Marks)

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Elastic Inelastic
Why? Because Elastic demand will be assumed because people are prepared to pay 12 cents even
they need to pay 6 cents. Thus, in case per unit cost will be in range of 4-6 demand increase.
(no more than 10 words)
8. How much subsidy (expressed in present value terms) will the government need to provide for
Proposal A in order to encourage the producer to sell electricity at the competitive market prices
throughout the 60 year project duration? (2 Marks)
$ bn
7.04
Please, present your calculations? (just two steps)
Producer surplus of monopoly + Producer surplus of oligopoly=1.61+5.43= 7.04 billon

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9. Please calculate price elasticity of demand for Project A when price the price of electricity
increases from 4 cents per unit to 6 cents per unit? (2 Marks)
0.22
Please, present your calculations? (just two steps)
45-40=5
E= (Change in Q/Q)/(Change in P/P)= (5/45)/(2/4)=0.11/0.5=0.22
10. What is the relation between the concepts of Equivalent Annual Cost (EAC) and Life Cycle Cost
(LCC)? (2 Marks)
EAC cost reflect the annual maintenance cost of the specific asset. There is association between EAC
and LCC because in LCC already cost that are reflected by EAC is covered.
(no more than 10 words)

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APPENDIX
Hydroelectricity project
Life of project 60
Power generation 40,000,000,000
Tariff 7
Annual operation and maintinance cost 4%
Apparent annual discount rate 15.50%
Annual inflation rate 8%
Cost of hydro project 20,000,000,000,000
Value of units $280,000,000,000
Revenue
Operation and
maintenance cost Net value
Discount
rate
1
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.9259259
26
2
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.8573388
2
3
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.7938322
41
4
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.7350298
53
5
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.6805831
97
6
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.6301696
27
7
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.5834903
95
8
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.5402688
85
9
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.5002489
67
10
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.4631934
88
11
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.4288828
59
12
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.3971137
59
13
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.3676979
25
14
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.3404610
41
15
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.3152417
05
16
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.2918904
68
17
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.2702689
51
18
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.2502490
29
19 $280,000,000,000.0 800000000000.00 - 0.2317120

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0 $520,000,000,000.00 64
20
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.2145482
07
21
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1986557
48
22
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1839405
07
23
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1703152
84
24
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1576993
37
25
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1460179
05
26
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1352017
64
27
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1251868
18
28
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1159137
21
29
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.1073275
19
30
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0993773
33
31
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0920160
49
32
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0852000
45
33
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0788889
31
34
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0730453
06
35
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0676345
43
36
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0626245
77
37
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0579857
19
38
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0536904
81
39
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0497134
08
40
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0460309
33
41
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0426212
35
42
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0394641
06
43
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0365408
39
44
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0338341
1
45 $280,000,000,000.0 800000000000.00 - 0.0313278

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0 $520,000,000,000.00 8
46
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0290072
96
47
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0268586
07
48
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0248690
81
49
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0230269
27
50
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0213212
29
51
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0197418
78
52
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0182795
17
53
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0169254
79
54
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0156717
39
55
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0145108
7
56
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0134359
91
57
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0124407
32
58
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0115191
96
59
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0106659
23
60
$280,000,000,000.0
0 800000000000.00
-
$520,000,000,000.00
0.0098758
54
Reven
ue
$16,800,000,000,00
0.00 $48,000,000,000,000.00
-
$31,200,000,000,000
.00
12.376551
82
NPV
Cost of hydro project $20,000,000,000,000.00
NPV -$366,148,416,852,361.00
Benefit to cost ratio
PV of benefits -$31,200,000,000,000.00
PVIFA 12.37655182
Cost of hydro project $20,000,000,000,000.00
Annual cost of 1*PVIFA $20,000,000,000,012.40
Benefit to cost ratio -19.30742084
Equivalent annual cost
LCC $40,000,000,000,012.40
EAC $3,231,917,950,546.83
Consumer surplus(Monopoly)

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B 40,000,000,000
H 6
Consumer surplus 120000000000.00
PVIFA total for 10 years 6.710081399
Total consumer surplus 8.0521E+11
Consumer surplus(Oligopoly)
B 40,000,000,000
H 6
Consumer surplus 1.2E+11
PVIFA for years from 20 to 11 4.547701944
Total consumer surplus 5.45724E+11
Consumer surplus(Competitive)
B 40000000000
H 6
Consumer surplus 1.2E+11
PVIFA for years from 21 to 60 1.118768479
Total consumer surplus 1.34252E+11
Aggregate of consumer surplus 1.48519E+12
Producer surplus(Monopoly)
B 40,000,000,000
H 6
Producer surplus 2.4E+11
PVIFA for 10 years 6.710081399
Total producer surplus 1.61042E+12
Producer surplus (Oligopoly)
B 40000000000
H 6
Producer surplus 1.2E+11
PVIFA for years from 20 to 11 4.547701944
Total producer surplus 5.45724E+11
Producer surplus (Competitive)
B 40000000000
H 6
Producer surplus 1.2E+11
PVIFA for years from 21 to 60 1.118768479
Total producer surplus 1.34252E+11
Aggregate of producer surplus 2.2904E+12
Total surplus 3.77558E+12

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Thermal project
Life of project 30
Power generation 40,000,000,000
Tariff 10
Annual operation and maintenance
cost 9%
Apparent annual discount rate 18.96%
Annual inflation rate 8%
Cost of hydro project 20,000,000,000,000
Value of units $400,000,000,000
Revenue
Operation and
maintenance cost Net value
Discount
rate
1 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.9259259
26
2 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.8573388
2
3 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.7938322
41
4 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.7350298
53
5 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.6805831
97
6 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.6301696
27
7 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.5834903
95
8 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.5402688
85
9 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.5002489
67
10 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.4631934
88
11 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.4288828
59
12 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.3971137
59
13 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.3676979
25
14 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.3404610
41
15 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.3152417
05
16 $20,000,000,000,000 $1,800,000,000,000 $18,200,000,000,000. 0.2918904

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00 68
17 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.2702689
51
18 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.2502490
29
19 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.2317120
64
20 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.2145482
07
21 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1986557
48
22 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1839405
07
23 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1703152
84
24 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1576993
37
25 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1460179
05
26 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1352017
64
27 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1251868
18
28 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1159137
21
29 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.1073275
19
30 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0993773
33
31 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0920160
49
32 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0852000
45
33 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0788889
31
34 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0730453
06
35 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0676345
43
36 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0626245
77
37 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0579857
19
38 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0536904
81
39 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0497134
08
40 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0460309
33
41 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0426212
35
42 $20,000,000,000,000 $1,800,000,000,000 $18,200,000,000,000. 0.0394641

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00 06
43 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0365408
39
44 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0338341
1
45 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0313278
8
46 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0290072
96
47 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0268586
07
48 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0248690
81
49 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0230269
27
50 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0213212
29
51 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0197418
78
52 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0182795
17
53 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0169254
79
54 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0156717
39
55 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0145108
7
56 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0134359
91
57 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0124407
32
58 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0115191
96
59 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0106659
23
60 $20,000,000,000,000 $1,800,000,000,000
$18,200,000,000,000.
00
0.0098758
54
Reven
ue
$1,200,000,000,000,0
00.00 $108,000,000,000,000.00
$1,092,000,000,000,0
00.00
12.376551
82
NPV
8% 18.96% IRR
Cost of hydro project $20,000,000,000,000.00 $20,000,000,000,000.00 27%
NPV $13,535,194,589,832,600.00 $5,779,321,354,342,570.00
Benefit to cost ratio
PV of benefits $1,092,000,000,000,000.00
PVIFA 12.37655182
Cost of hydro project $20,000,000,000,000.00
Annual cost of 1*PVIFA $20,000,000,000,012.40
Benefit to cost ratio 675.7597295

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Equivalent annual cost
LCC $40,000,000,000,012.40
EAC $3,231,917,950,546.83
Consumer surplus(Monopoly)
B 40,000,000,000
H 9
Consumer surplus 180000000000.00
PVIFA total for 10 years 6.710081399
Total consumer surplus 1.20781E+12
Consumer surplus(Oligopoly)
B 40,000,000,000
H 9
Consumer surplus 1.8E+11
PVIFA for years from 20 to 11 4.547701944
Total consumer surplus 8.18586E+11
Consumer
surplus(Competitive)
B 40000000000
H 9
Consumer surplus 1.8E+11
PVIFA for years from 21 to 60 1.118768479
Total consumer surplus 2.01378E+11
Aggregate of consumer surplus 2.22778E+12
Producer surplus(Monopoly)
B 40,000,000,000
H 9
Producer surplus 3.6E+11
PVIFA for 10 years 6.710081399
Total producer surplus 2.41563E+12
Producer surplus (Oligopoly)
B 40000000000
H 9
Producer surplus 1.8E+11
PVIFA for years from 20 to 11 4.547701944
Total producer surplus 8.18586E+11
Producer surplus (Competitive)
B 40000000000
H 9
Producer surplus 1.8E+11
PVIFA for years from 21 to 60 1.118768479
Total producer surplus 2.01378E+11

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Aggregate of producer surplus 3.43559E+12
Total surplus 5.66337E+12