Question:
The main objective of this analysis is to ascertain the financial and economic viabilities of the two proposals. The estimated capital cost of each of these proposals, you might recall, is $30 billion (bn). Other details are provided below.
Proposal A
Financial
Proposal A envisages generation of electricity from water - a hydro-electric project. The useful economic life of this project is estimated to be 60 years. This project will generate 50,000 million (mn) units of electricity annually. Electricity will be sold to the public at a tariff of 8 cents per unit. The annual operation and maintenance costs are expected to be 3.3 percent of the capital cost.
Economic (Social)
The economic (social) costs and benefits for this project must be estimated from Figure 1.
Proposal B
Financial
Proposal B is a thermal project - electricity will be generated from coal. The annual operating costs for this project are estimated to be 8 percent of the capital cost. This project will also have a useful economic life of 60 years. It will generate 45,000mn units of electricity annually. The electricity from this project will be sold at 12 cents per unit.
Economic (Social)
The economic (social) costs and benefits for this project must be estimated from Figure 2.
Task
Your task is simply to present the results of your analysis in the answer-sheet provided separately.
Answer:
Summarize Result:
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Financial
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Economic
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Proposal A
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Proposal B
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Proposal A
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Proposal B
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NPV
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-$13278591307.74
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-$13334144160.54
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-$17722819531.60
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-$19333852262.74
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IRR
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10%
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10%
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7%
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6%
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PB
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9.97
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9
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13.57
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15.63
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B/C
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-0.44
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-.044
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-0.59
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-.64
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Equivalent Annual Cost
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-$2390262720.80
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-2400262720.80
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-$3190262720.80
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-$3480262720.80
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Consumer Surplus
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$10000000000000
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$135000000000
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$10000000000000
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$135000000000
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Producer Surplus
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$10000000000000
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$135000000000
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$10000000000000
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$135000000000
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Total Surplus
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$20000000000000
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$270000000000
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$20000000000000
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$270000000000
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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.
Annexure
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Financial Evaluation of Proposal A: Hydroelectric project
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Particulars
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Amount
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Capital cost of the project
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$30,000,000,000.00
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Estimated life (years)
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60
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Electricity generated annually (units)
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50000000000
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Tariff per unit
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0.08
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Annual operation and maintenance cost
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3.30%
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Sales per annum
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$4,000,000,000.00
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annual operation and maintenance costs
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$990,000,000.00
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Net income/cash flow
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$3,010,000,000.00
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Discount rate
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18.00%
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Present Value of cash inflow
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$16,721,408,692.26
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Capital cost of project
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$30,000,000,000.00
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Net Present value
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-$13,278,591,307.74
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Economic Evaluation of Proposal A: Hydroelectric project
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Particulars
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Amount
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Capital cost of the project
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$30,000,000,000.00
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Estimated life (years)
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60
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Electricity generated annually (units)
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40000000000
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Tariff per unit
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0.08
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Annual operation and maintenance cost
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3.30%
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Sales per annum
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$3,200,000,000.00
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annual operation and maintenance costs
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$990,000,000.00
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Net income/cash flow
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$2,210,000,000.00
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Discount rate
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18.00%
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Present Value of cash inflow
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$12,277,180,468.40
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Capital cost of project
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$30,000,000,000.00
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Net Present value
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-$17,722,819,531.60
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Financial Evaluation of Proposal B: Thermal Project
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Particulars
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Amount
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Capital cost of the project
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$30,000,000,000.00
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Estimated life (years)
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60
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Electricity generated annually (units)
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45000000000
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Tariff per unit
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0.12
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Annual operation and maintenance cost
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8.00%
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Sales per annum
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$5,400,000,000.00
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annual operation and maintenance costs
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$2,400,000,000.00
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Net income/cash flow
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$3,000,000,000.00
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Discount rate
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18.00%
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Present Value of cash inflow
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$16,665,855,839.46
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Capital cost of project
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$30,000,000,000.00
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Net Present value
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-$13,334,144,160.54
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Economic Evaluation of Proposal B: Thermal Project
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Particulars
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Amount
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Capital cost of the project
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$30,000,000,000.00
|
|
Estimated life (years)
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60
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Electricity generated annually (units)
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36000000000
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Tariff per unit
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0.12
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Annual operation and maintenance cost
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8.00%
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Sales per annum
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$4,320,000,000.00
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annual operation and maintenance costs
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$2,400,000,000.00
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Net income/cash flow
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$1,920,000,000.00
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Discount rate
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18.00%
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Present Value of cash inflow
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$10,666,147,737.26
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Capital cost of project
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$30,000,000,000.00
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Net Present value
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-$19,333,852,262.74
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