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Economic And Financial Impact Of Natural Disasters Add in library

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Question:

Describe about Understanding the Economic and Financial Impact of Natural Disasters?
 
 

Answer:

Introduction

Management decision model plays an effective role for every individual other than the respective business organizations. Such kind of model involves several methods and techniques to analyze any decision related to any given problem of the society (Benson & Clay, 2004). It can be inferred that the given case deals with the effect of hurricane Katrina on the city of New Orleans. There are various techniques and policies that are required to be evaluated to understand and analyze the effect of such disaster on the particular city. This can be analyzed with the help of an effective system of cost benefit analysis. It can be also analyzed with the help of Federal Emergency Management Agency.

Analysis of economics of New Orleans

It can be inferred that there are several decisions that can be associated with the city of New Orleans. There are several levees that can protect the cities in an effective manner. It can be further opined that there are several direct or indirect costs that are associated with the rebuilding of the city in an effective manner. Though, there is a probability of 63 percent occurrence of the given hurricane. There is a greater risk that can occur in the given city effectively. It can be further inferred that a separate an effective cost benefit analysis is required to be evaluated by the management of Federal Emergency Management Agency to minimize the effect of the given occurrence (Jaldell, 2013).

The given availability of heuristics will increase the total risk of the society in an effective manner. In addition to this, it can be also deduced that it has a direct correlation with the population drop among the city. In addition to this, the status of the economy will go down at a decreasing rate if the total number of population of people drops to the adverse effect of the given risk. The Gross Domestic Product, Gross and Net National Income of the economy will also decline due to effect of the given costs. In addition to this, it can be also deduced that an effective cost benefit analysis is required to be developed to judge the benefits as well as consequences of the given hurricane (Hahn, 2005).

Tangible Benefits

Category

In $US

Risk Reduction costs

 $      150,000,000.00

Reduction of errors

 $          7,500,000.00

Increased flexibility

 $        10,000,000.00

Increased speed of activity

 $        40,000,000.00

Improvement in management planning and control

 $        25,000,000.00

Costs (Other)

 $          1,000,000.00

Total Tangible Benefits

 $      233,500,000.00

 

 

Tangible One-Time Costs

Category

In $US

Development costs

 $      140,000,000.00

Recurring costs

 $        80,000,000.00

New implementation of technology

 $                2,500.00

User training

 $                2,500.00

Site preparation

 $                3,500.00

Other

 $                2,000.00

Total  One-Time Costs (Tangible)

 $      220,010,500.00

 

 

Tangible Recurring Costs

Category

In $US

Application  maintenance of the disaster

 $        20,000,000.00

Incremental inhabitation of the residents

 $        15,000,000.00

Incremental communications

 $        25,000,000.00

New leases of land

 $          1,000,000.00

Supplies

 $          1,500,000.00

Other

 $        10,000,000.00

Total Tangible Recurring Costs

 $        72,500,000.00

 

Table 1: Cost Benefit analysis for re-building of the city

Break Even Analysis

Existing System (Costs)

Year 1-10

Year 10-20

Year 20-30

Year 30-40

Year 40-50

Cost of developement

 $       140,000,000

 $                   -  

 $                       -  

 $                                -  

 $                  -  

Additional leeves

 $       350,000,000

 $      35,000,000

 $          35,000,000

 $                         30,000

 $           30,000

Operation costs of the hurricane katrina

 $         80,000,000

       

User time during development

 $         10,000,000

 $                   -  

 $                       -  

 $                                -  

 $                  -  

Maintenance costs

 $       150,000,000

 $              1,000

 $                  1,000

 $                           1,000

 $             1,000

Total Cost of Existing System

 $       730,000,000

 $      35,001,000

 $          35,001,000

 $                         31,000

 $           31,000

Costs of Proposed System

Year 1-10

Year 11-20

Year 21-30

Year 31-40

Year 41-50

Development costs

 $       140,000,000

 $                   -  

 $                       -  

 $                                -  

 $                  -  

Additional leeves

 $         25,000,000

 $        1,500,000

 $            1,500,000

 $                           1,500

 $             1,500

Operation costs of the hurricane katrina

 $         80,000,000

       

User time during development

 $           1,000,000

 

 $                     600

 $                             600

 $                600

Maintenance costs

 $           1,000,000

 $              1,500

 $                  1,500

 $                           1,000

 $             2,000

Total Cost of Proposed System

 $       247,000,000

 $        1,501,500

 $            1,502,100

 $                           3,100

 $             4,100


Table 2: Break-even analysis of the proposed system

 Break-even analysis of the proposed system

Figure 1: Break-even analysis of the proposed system

From the above analysis, it can be inferred that the costs of the proposed system is lower than the existing system of the city New Orleans. It can be inferred that the benefits are much higher than the total number of tangible costs. Apart from this, it can be also inferred that the intangible and tangible costs of the proposed project is on the lower side in terms of costs and benefits. For this reason, it can be deduced that reduction of costs and reduction of errors can be the major sources in terms of minimizing the effect of the floods of the hurricane. It can be also defined that the development costs of the levees and its management will incur fewer costs in the proposed system rather the existing system of management. It deduces that these are the parameters that can be considered in terms of the development of cost benefit analysis (Jaldell, 2013).

 

Evaluation of the value of the Cost Benefit Analysis for each of the given options

It can be there are several given options in terms of cost benefit analysis. There are two options for the given system of protection. One of the systems is the existing system and one of the systems is the proposed one. Both of them have a chance of occurrence of 63 percent in terms of occurrence of event. This is in terms of cost benefit analysis of the following decision tree.

 Decision Tree Analysis of the Project

Figure 2: Decision Tree Analysis of the Project

(Source Created By Author)

From the decision tree analysis and cost benefit analysis, it can be deduced that the probability of occurrence of the hurricane disaster in on the higher side. This further reflects that it is important for the given city to protect itself from the respective damages that can be interpreted due to the given damages of the hurricane. Due to this reason, the proposed system of benefits have been analyzed and evaluated that will further help to boost up the economic system of the New Orleans. It can be also inferred that the protection of the city will also increase the total fixed costs and variable costs of New Orleans. The total direct costs are required to be minimized and amplified on the basis of short term basis. It can be inferred that if the disruptions of the daily lifestyles are minimized to a great extent, the economy of the country will boom up to a greater extent. In addition to this, it can be also deduced that inflation can occur in the economy of New Orleans due to the shock of the flood, financial constraints and management of reconstruction of business. The low income level of families will be greatly affected by the given changes and will try to boost up the economy by a greater extent. The amount of disaster relieve flood system is required to be increased due to the large effect of the funds in the current prospective system. The total amount and effect of resettlement issue are required to be evaluated in an effective manner due to the positive effect of the post benefit analysis. In addition to this, the existence of several countervailing risks cannot be ignored in any form of given case. This is the reason why several recommendations can be given to minimize and nullify the risks to a greater extent (Hahn, 2005).

Decision pitfalls and recommendations to avoid the given challenges

There are several pitfalls that can be taken into consideration for the re-building of the city in terms of the given proposal of cost benefit analysis. In addition to this, these decision pitfalls include in terms of risk and structure of reconstruction of the levees of the New Orleans. It can be inferred that the total amount of fixed costs and variable costs of the disaster may arise if the chances of probability increases. In addition to this, it can be inferred that if any form of disaster occurs within the first ten years of the proposed system, then the overall planning of the proposed system will hamper and the following costs and after effect of the disaster will be bound to increase. For this reason, it is extremely important for Federal Emergency Management Agency to take several pre-active measures to overcome the given problems in a strategic manner (Pielke et al. 2005)

These recommendations can be in the form of minimization of the initial fixed and variable costs within the first ten year itself. It is important to make the investment in terms of onetime payment to protect against any sort of further damages. It is true that the probability of occurrence the disaster is only once in 100 years, still, it may increase due to the variation of climatic changes.  For this reason, it is important to analyze the break-even analysis of the given proposal to minimize the respective pitfalls of investment. In addition to this, a proper risk management system is required to be introduced to minimize the risks of flood protection and several moral and physical hazards. Apart from this, there are several vulnerable areas of concern due to the risk management issues of the system. However, on the contrary, the overall cost benefit analysis model has not accounted for the different risks related to the issues of risk management. The investment of the total analysis may be raised from the given population of the country. This may have negative consequences among the middle and lower income group people of the society. In addition to this, the residents of the protected areas will also be the sufferers of the proposed system (Jaldell, 2013). The total amount of cost benefit analysis is fixed for each of the constituencies of the residents of New Orleans, residents of the surroundings, mayor and the federal government. Each and every constituency will be benefited from the given utility pie.

 

Executive summary

This part of the report will highlight the dual aspects of the re-building activities of New Orleans. This portion will also highlight the usage of social heuristics in terms of solving problems both in ethical and unethical manner. The role of the constituencies has also been discussed with the given report.

For or against rebuilding of the city of New Orleans

In case of favour of re-building the city of New Orleans, it can be deduced that the benefits of investment can be discussed from the analysis of the given table and graph of payback period return. In addition to this, it is deduced that if the payback period is higher, then, the re-building of the city can be extremely benefitted.

 

Benefits of option

Year 1-10

Year 10-20

Year 20-30

Year 30-40

Year 40-50

Staff savings

 $                   45,000

 $                   60,000

 $                      60,000

 $                 60,000

 $                                         30,000

Improved buying practice

 $                     7,500

 $                     7,500

 $                        7,500

 $                   7,500

 $                                           7,000

Improved service

 $                     3,000

 $                     2,000

 $                        2,000

 $                   2,000

 $                                                -  

Total Benefits

 $                   55,500

 $                   69,500

 $                      69,500

 $                 69,500

 $                                         37,000

Costs of option

Year 1

Year 2

Year 3

Year 4

Year 5

Development costs

 $           140,000,000

 $                          -  

 $                             -  

 $                        -  

 $                                                -  

Additional levees

 $             25,000,000

 $               1,500,000

 $                  1,500,000

 $                   1,500

 $                                           1,500

Operation costs of the hurricane Katrina

 $             80,000,000

 $                          -  

 $                             -  

 $                        -  

 $                                                -  

User time during development

 $               1,000,000

 $                          -  

 $                           600

 $                      600

 $                                             600

Maintenance costs

 $               1,000,000

 $                     1,500

 $                        1,500

 $                   1,000

 $                                           2,000

Total Costs

 $           247,000,000

 $               1,501,500

 $                  1,502,100

 $                   3,100

 $                                           4,100

Net benefits/costs

 $          (246,944,500)

 $              (1,432,000)

 $                 (1,432,600)

 $                 66,400

 $                                         32,900

Cumulative benefits/costs

 $          (246,944,500)

 $          (248,376,500)

 $             (249,809,100)

 $        (249,742,700)

 $                                (249,709,800)

 

Payback period analysis of the proposed system of re-building

Figure 3: Payback period analysis of the proposed system of re-building

 

It can be inferred that the payback system of the proposed system of re-building is on the positive side. Therefore, it can be considered as one of the merits. Apart from this, all the residents of the city will be extremely benefited from the proposed system effectively. In addition to this, the population of the city will not be effected and the structure of economy will not be hampered due to this. In addition to this, it is deduced that residents living in the area surrounding the flood plains will also be benefitted to a greater extent. On the other hand, the mayor and federal government will be also be benefitted as certain portion of losses can be avoided to a greater extent. In addition to this, if the economic structure of the city is not hampered, then, all the given constituencies will enjoy high and steady income status. On the other hand, it can be also deduced that if the risk can be minimized, then the surrounding regions will also not be affected.  Therefore, it can be considered as all round benefit in terms of growth and status. In addition to this, there are several precautionary measures that have been to prevent the downward risks. Another form of advantage that may be considered is regarding the development of the city in all aspects. This can be in the form economic development, resource development, tourist development and all kinds of development which can be considered to be effective for a particular city ( Jaldell, 2013)

However, it can be inferred that there are several reasons that can be considered as against the rebuilding the city of New Orleans. One of the factors that can be considered is the lower amount of net present value of investment. In addition to this, it is deduced that since the net present value is lower, therefore, the structure of investment is required to be re-considered. This can be further evaluated with the help of the following table:-

 

Cost Benefit Analysis using Present Value (Purchasing Operations Support)

Benefits of option

Year 1

Year 2

Year 3

Year 4

Year 5

Staff savings

 $                          45,000

 $                             60,000

 $                         60,000

 $                 60,000

 $                                        30,000

Improved buying practice

 $                           7,500

 $                               7,500

 $                           7,500

 $                   7,500

 $                                          7,000

Improved service

 $                           3,000

 $                               2,000

 $                           2,000

 $                   2,000

 $                                               -  

Total Benefits

 $                          55,500

 $                             69,500

 $                         69,500

 $                 69,500

 $                                        37,000

Costs of option

Year 1-10

Year 10-20

Year 20-30

Year 30-40

Year 40-50

Development costs

 $                  140,000,000

 $                                    -  

 $                                -  

 $                        -  

 $                                               -  

Additional levees

 $                   25,000,000

 $                        1,500,000

 $                     1,500,000

 $                   1,500

 $                                          1,500

Operation costs

 $                   80,000,000

 $                                    -  

 $                                -  

 $                        -  

 $                                               -  

User time during development

 $                     1,000,000

 $                                    -  

 $                              600

 $                      600

 $                                            600

Maintenance costs

 $                     1,000,000

 $                               1,500

 $                           1,500

 $                   1,000

 $                                          2,000

Total Costs

 $                  247,000,000

 $                        1,501,500

 $                     1,502,100

 $                   3,100

 $                                          4,100

Net benefits/costs

 $                 (246,944,500)

 $                       (1,432,000)

 $                    (1,432,600)

 $                 66,400

 $                                        32,900

Cumulative benefits/costs

 $                 (246,944,500)

 $                    (248,376,500)

 $                (249,809,100)

 $        (249,742,700)

 $                               (249,709,800)

Net benefits/cost (NPV @ 5%)

($235,185,238.10)

($1,298,866.21)

($1,237,533.74)

$54,627.44

$25,778.01

Cumulative NPV

($235,185,238.10)

($236,484,104.31)

($237,721,638.05)

($237,667,010.61)

($237,641,232.60)

 

 

 

 

 

 

 

 Net Present value analysis of the proposed system of re-building

Figure 4: Net Present value analysis of the proposed system of re-building

From the above table, it can be deduced that the net present value of the proposed system is coming down to be negative. This can have a negative impact over the lower income group of the society, as the total amount of investment will be derived from them only. This will have a negative impact on the residents that are paying taxes to the government. This is mainly because, the total amount of investments are bound to increase. Therefore, it may also have a negative impact on the local government as well. In addition to this, the probability of occurrence of the disaster is not higher, therefore, it can be inferred that the total amount of investment evaluated through the cost benefit analysis, and then it can be considered as a loss. It is deduced that the probability of occurrence of the hurricane is only once in every 100 years. Therefore, it may be inferred that the newly proposed system of re-building of the city of New Orleans may not be required (Labunets, 2014).

However, social heuristics can be used as an advantageous tool both in ethical and unethical manner. This is a tool that can be used for the re-building of the city New Orleans. This can also effect the total decisions and its management in terms of development of the society of New Orleans. Among the various types of social heuristic tools, the tool of equity heuristic can be implemented for the purpose of re-building. This further suggests that the equal amount of resources will be distributed to all the segments of people of society. This can also be done with the help of ethical and unethical manner. If the total number of sources can be distributed in an equal manner, then, the process of re-building can be effectively used by the all different constituencies. All the factors of the risk can be easily mitigated with the help of these tools. The role of the federal government forms the core of success of the given activities. The given roles that can be considered are in terms of equal distribution of resources to all segments of the economy (Von Halle & Goldberg, 2010). If the resources are equally distributed, then, segment of income will also be equally distributed. In addition to this, all the activities can be carried with the help of ethical manner as well. This can also be considered as an advantage for the purpose of re-building.

 

Conclusion

It can be inferred that management and decision tools and techniques can be implemented for a development of a particular city of New Orleans. All the tools and techniques have been analyzed through the given report. In addition to this, the merits and demerits of the re-building of the city have been considered with the view of the given constituencies. It is proposed that re-building of the city is preferable in all respects.

 

References

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Blanning, R. (1993). Model management systems. Decision Support Systems, 9(1), 9-18. doi:10.1016/0167-9236(93)90019-y

Boardman, A., & Forbes, D. (2011). A Benefit-Cost Analysis of Private and Semi-Private Hospital Rooms. Journal Of Benefit-Cost Analysis, 2(1). doi:10.2202/2152-2812.1050

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