49003 Economic Evaluation Assignment 2: Project Proposals Analysis

This assignment analyzes the economic and financial viability of two project proposals, A and B, focusing on a hydroelectric project (A) and a thermal project (B). The assignment requires the student to summarize results, make investment recommendations from both investor and economic perspectives, and consider the impact of factors like hyperinflation and market structures. It delves into sensitivity analysis, calculating the switching value of capital cost and determining the elasticity of demand. The student also calculates the government subsidy needed to encourage competitive market production levels and explores the relationship between Life Cycle Cost and Equivalent Annual Cost. The financial and economic evaluations include calculations of NPV, IRR, PB, B/C ratio, and surplus values for both proposals.

Name:
Student #:
49003 ECONOMIC EVALUATION
Assignment # 2 (Autumn 2018)
Due: 4 June 2018 (no later than 4.00 pm)
ANSWER-SHEET
Please summarize your results in the table below: (5 Marks)
Financial Economic
Proposal A Proposal B Proposal A Proposal B
NPV
-
$13278591307.
74
-
$13334144160.
54
-
$17722819531.
60
-
$19333852262.
74
IRR 10% 10% 7% 6%
PB 9.97 9 13.57 15.63
B/C -0.44 -.044 -0.59 -.64
Equivalent Annual Cost -
$2390262720.8
0
-
2400262720.80
-
$3190262720.8
0
-
$3480262720.8
0
Consumer Surplus
$100000000000
00
$135000000000 $100000000000
00
$135000000000
Producer Surplus
$100000000000
00
$135000000000 $100000000000
00
$135000000000
Total Surplus
$200000000000
00
$270000000000 $200000000000
00
$270000000000
49003-Assignmen 2-A2018-Answer Sheet Page 1 of 5

Note: NPV; Equivalent Annual Cost; Consumer, Producer, and Total Surplus - must be rounded off to
the nearest billion dollars (i.e., no decimals), and IRR and PB - to the nearest ‘whole’ percent and years
(i.e., no decimals), and B/C - to one decimal point, respectively.
1. Which proposal will you recommend from the investor’s perspective? (2 Marks)
A B Either Neither
Why? Because As per NOV proposal a is more beneficial than proposal B.
___________________________________________________________
________________________________________________________ (no more than 10 words)
2. Will your recommendation, based on economic perspective, change if – due to unanticipated
economic reasons – there is hyperinflation after the first twenty years of the project life span? (2
Marks)
Yes No
Why? Because as per economic evaluation total surplus is more in the proposal
B.____________________________________________________________
________________________________________________________ (no more than 10 words)
3. Will your recommendations, based on economic perspective change if the government fails to
convert the monopoly market into oligopoly and competitive markets (i.e., the market will remain
a monopoly throughout the project life spans)? (2 Marks)
Yes No
Why? Because _it will not affect the outcome of the
result.____________________________________________________________
_______________________________________________________ (no more than 10 words)
4. Will your recommendation (based on financial perspective) change if evaluation is carried out in
future value terms rather than present value terms. (2 Marks)
Yes No
Why? Because _the result of the financial outcome would remain same.
____________________________________________________________
49003-Assignmen 2-A2018-Answer Sheet Page 2 of 5

________________________________________________________ (no more than 10 words)
5. Is there a co-relation between Life Cycle Cost and Equivalent Annual Cost? (3 Marks)
Yes No
Why? EAC is calculated for determining the life cycle cost.
_____________________________________________________________
________________________________________________________ (no more than 10 words)
6. In Figure 2, the monopoly price is 12 cents per unit. Will the response of demand to price
increase beyond 12 cents per unit (i.e., higher than 12 cents per unit) be elastic or inelastic? (3
Marks)
Elastic Inelastic
Why? Because _the price is changing with the changing demand.
____________________________________________________________
________________________________________________________ (no more than 10 words)
7. Prices are generally lower in competitive markets as compared with those in monopoly markets.
Producers however argue that low prices do not enable them to receive adequate returns on their
investments. To counter this, the governments oftentimes – especially in the case of essential
commodities (for example, electricity) - provide direct subsidies to the monopoly producer. Such
subsidy is justified on the ground that it will improve community welfare. What is the total value
of subsidy (expressed in present value terms) that the government will need to pay for Proposal A
in order to encourage the producer to produce at competitive market levels of production? (3
marks)
$ bn
Please, present your calculations? (just two steps)
Present Value of cash inflow $16,721,408,692.26
Capital cost of project $30,000,000,000.00
Net Present value/Subsidy required -$13,278,591,307.74
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8. Sensitivity analysis can be used to determine how the viability of a project is influenced by over-
or under-estimation of various input variables. Assume that Total Surplus is used as the criterion
for assessing the viability of Project A. What is the ‘switching value’ of ‘capital cost’ for this
project? (3 marks)
$ bn
Please present your calculations? (in no more than two steps)
Switching value= (200000000000-270000000000)/(-13278591307-(-1334144160.54))
= 1260.061
ANNEXURE
Financial Evaluation of Proposal A: Hydroelectric project
Particulars Amount
Capital cost of the project $30,000,000,000.00
Estimated life (years) 60
Electricity generated annually (units) 50000000000
Tariff per unit 0.08
Annual operation and maintenance cost 3.30%
Sales per annum $4,000,000,000.00
annual operation and maintenance costs $990,000,000.00
Net income/cash flow $3,010,000,000.00
Discount rate 18.00%
Present Value of cash inflow $16,721,408,692.26
Capital cost of project $30,000,000,000.00
Net Present value -$13,278,591,307.74
Economic Evaluation of Proposal A: Hydroelectric project
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Particulars Amount
Capital cost of the project $30,000,000,000.00
Estimated life (years) 60
Electricity generated annually (units) 40000000000
Tariff per unit 0.08
Annual operation and maintenance cost 3.30%
Sales per annum $3,200,000,000.00
annual operation and maintenance costs $990,000,000.00
Net income/cash flow $2,210,000,000.00
Discount rate 18.00%
Present Value of cash inflow $12,277,180,468.40
Capital cost of project $30,000,000,000.00
Net Present value -$17,722,819,531.60
Financial Evaluation of Proposal B: Thermal Project
Particulars Amount
Capital cost of the project $30,000,000,000.00
Estimated life (years) 60
Electricity generated annually (units) 45000000000
Tariff per unit 0.12
Annual operation and maintenance cost 8.00%
Sales per annum $5,400,000,000.00
annual operation and maintenance costs $2,400,000,000.00
Net income/cash flow $3,000,000,000.00
Discount rate 18.00%
Present Value of cash inflow $16,665,855,839.46
Capital cost of project $30,000,000,000.00
Net Present value -$13,334,144,160.54
Economic Evaluation of Proposal B: Thermal Project
Particulars Amount
Capital cost of the project $30,000,000,000.00
Estimated life (years) 60
Electricity generated annually (units) 36000000000
Tariff per unit 0.12
Annual operation and maintenance cost 8.00%
Sales per annum $4,320,000,000.00
annual operation and maintenance costs $2,400,000,000.00
Net income/cash flow $1,920,000,000.00
Discount rate 18.00%
Present Value of cash inflow $10,666,147,737.26
Capital cost of project $30,000,000,000.00
Net Present value -$19,333,852,262.74
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