UTS Economic Evaluation Assignment #2: A Detailed Solution (2019)

This document presents a solution to an economic evaluation assignment focused on comparing two project proposals (A and B) from both financial and economic perspectives. The analysis includes calculating and comparing Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period (PB), Benefit-Cost Ratio (B/C), Life Cycle Cost, Equivalent Annual Cost, Consumer Surplus, Producer Surplus, Total Surplus, and Deadweight Loss for each proposal. The solution then answers a series of questions regarding the investor's perspective, the impact of consumer surplus, the influence of opportunity cost, demand elasticity, and the effects of hyperinflation and market structure changes on project recommendations. Finally, it estimates the subsidy required for Proposal B to achieve competitive market prices.

Name:
Student #:
49003 ECONOMIC EVALUATION
Assignment #2 (Autumn 2019)
Due: 3June 2019
ANSWER-SHEET
Please summarize your results in the table below: (9Marks)
Financial Economic
Proposal A Proposal B Proposal A Proposal B
NPV -131.37 -131.37 6552.39 12074.66
IRR -0.03% -0.03% 1.74% 3.09%
PB 40 Years 40 Years 8 Years 7.5 Years
B/C 99.74% 99.78% 113.11% 120.15%
Life Cycle Cost 100000 100000 100000 160000
Equivalent Annual Cost 1666.67 1666.67 1666.67 2666.67
Consumer Surplus 120000 120000 120000 135000
Producer Surplus 240000 240000 180000 210000
Total Surplus 360000 360000 300000 345000
Deadweight Loss 20000 20000 20000 60000
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’sperspective? (2Marks)
A B Either Neither
Why? Because the proposal B is having more economic and social benefits as compared to the
proposal A
49003-Assign2A2019-answer template Page 1 of 3

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, both the proposal are having the same consumers surplus in terms of financial
perspective.
3. Will your recommendation, based on economic perspective, change if the opportunity cost of
money is zero?(2Marks)
Yes No
Why? Because on the basis of the consumers’ surplus in the economic perspective, the proposal
B is having more consumers’ surplus as compared to the 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: (2Marks)
Elastic Inelastic
Why? Because as a result of change in price from 9 to 12 the demand will also be changed from
40,000 to 30,000.
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 after that the value of investment has already been extracted and no further
benefit is expected from the investment at the initial stages.
6. Will yourrecommendations, 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 oligopolyfor the last 40
years of project life-spans)? (3 Marks)
Yes No
Why? Because the parameters for decision making and market analysis and the consumes and
produces surplus will be changed.
49003-Assign2A2019-answer template Page 2 of 3

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
marketpricesthroughout the 60 year project duration? (3Marks)
$ bn
Present Value of Cash Inflows $9967.16 Million
Initial Investment $40000 Million
Saubsidy Required (40000-9967.16) = $30 Billion
49003-Assign2A2019-answer template Page 3 of 3
30