Background:
The RA of the Notsremlap region (in the developing country of Notram) is keen to attract industry and economic growth to its region. The RA has proposed to drain a swamp near the Utawanam River and use the area for industrial development as land for such use is limited. A company has put forward a proposal (to the RA) to build a factory to produce widgets, a new commodity with great export potential. The drainage scheme proposal is combined with a separate flood control project and the RA is keen to see the two approved by government. If these are approved, then consideration can be given to the factory proposal. Details of these proposals are given below.
The Utawanam swamp, which is to be drained, currently supports a commercial fishery (mudfish is considered a delicacy by the Notsremlap people) and is popular with the people in the region for recreational and scientific activities. The fishery and recreational activities will go if the swamp is drained, since the factory is to be built on the drained land.
The flood control scheme involves the raising of stop banks and will result in significant benefits to downstream farmers and to the catchment authority. The stop banks will result in a lower probability of flooding and associated damages and will create peace of mind for the small-scale farmers.
The new widget production factory has a production process that produces a lot of heat so that it is necessary to use water for cooling. Water will be taken from the river upstream from the factory, used for cooling, and returned to the river downstream. The production of widgets
requires inputs of heavy metals and chemicals, some of which will contaminate the wastewater. Therefore, the proposal includes building an effluent treatment plant.
The swamp is the only wetland area in the region and is favoured by the local townspeople as a recreational site. Recently a group of students from the national university (in the capital of Notram) surveyed people in the Notsremlap region and conducted a choice experiment within the survey. The survey was a random sample of the regional population. The results show that there is a real interest in the wetland and that the average willingness to pay (WTP) for preservation of the wetland is $12.00 per person/year. The people who use the swamp for recreational and scientific purposes are nearly all from the region and the regional population is 330,000. All further relevant data for the project is given in the data appendix.
Part 1 (40 marks)
In order to provide detailed and defendable advice to the RA regarding the proposal, you need first, to carry out a CBA from a regional viewpoint. Calculate the NPV for the entire proposal.
To do this you will need to decide on a discount rate and in a text box or at the bottom of your spreadsheet you must justify your choice (or explain) your choice of discount rate.
The period of analysis is to be 10 years. Present a complete spreadsheet of your analysis showing the benefits, the costs, the net cash flow for each year, and the NPV for the entire combined project. The “without” situation benefits are to be expressed as costs in your analysis (since these are benefits foregone). Complete all the CBA on one sheet of your spreadsheet.
Within your main analysis you will need to group the different components of the proposed project so that you will be able to discuss the economic efficiency of each of the individual components (four of them) of the proposal (in Part 2), prior to making your final recommendation also (in Part 2). The factory proposal will need to be grouped with the swamp drainage scheme and the effluent plant, since it cannot go ahead without these components. You will also have the flood control scheme and the fishery and the recreational and scientific values. In Part 1 on your spreadsheet you will need to calculate the NPVs of each of the four components of the proposal.
You are to make the following assumptions:
1. As is usual in an economic analysis, do not incorporate inflation in your analysis.
2. All capital costs occur in year 0.
3. All other costs and revenues occur at the end of each year.
Part 1 must have these clearly in the spreadsheet (no word document submitted):
a) Discount rate and brief justification (4 marks)
b) NPV of each of the individual components of the proposal (6 marks)
c) NPV for the entire proposal (20 marks)
d) Excellent layout of spreadsheet clearly labelled answers (4 marks)
e) On the same spreadsheet sheet, set up a table and use it to plot a graph to demonstrate the impact on the analysis of the overall project by varying the discount rate. At what discount rate would we observe a change in the analysis that would cause us to change our recommendation (based solely on the CBA to this point)? Write this on your spreadsheet. Save and keep your spreadsheet, as it is at this point, ready to submit for the completed Assignment 1: Part 1. (6 marks)
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