ECONOIVtrC EVALUATION
This assignment is about evaluation of two project options.
OptionA
Option A envisages generation of electriciry from water ftydro-electric project). The project is
proposed to be located in a remte area on a paoefl of fertile agricultural land with an expected yield
(benefits) over 30 years of $600Mn. This bnd, ifpunchased at the prevailing ma*€t price, will cost
$l00Mn.
Other capital on the project is as follows:
lnvestisation and Sun'e
Civil Works
Electrical Works
Transmission and Distribution \envork
Establishment costs dunns con:::-lJ1 ion
($Mn)
30
1700
s00
250
:'o
It is expected that the project u il1 requ
e S-l-sMn annually for maintenance purposes; additionally 0.5
percent of capital costs u'i1l be speni amuallr'on salaries and wages.
The project is designed for a usefu1 liie of 30 years. at the end of which it can be sold at 10 percent of
project capital cost.
Option B
Option B is a thermal project - electricity is generated from coal. The projet will require a one-off
expenditure of $200Mn to expand the coal mining capacrty of the existing mine near the proposed
project site. In the absence of the project, the site willbe develo@ into a major manufacturing
complex which will have an expected life-time benefits of $50OMn- Theproject site is cu
ently
pric€d at $50Mn- Other infrasnrcture related capital costs forthe project are estimated to be $1750
Mn.
This project will have 20 years of usefirl life. It is estimated that 2Mn tonnes of coal will be burnt
every year to produce electricity. The coal is priced at $50 p€r toflne. This coal, if not used for powe
generation, can be exported at a price of$80 per tonne-
Salaries and wages to the employees will cost $20Mn annually and maintenance an additional I
percent of capital cost. In social terms, salaries and wages will amormt to $4OMn-
Tasks
a) Evaluate the two options from Financial and Economic considerations-
For the purpose of these evaluations, select two viabilit-v indicators that are most suited fo
evaluating these projects. Provide a justification for your selection (i.e., why the indicators
selected by you are best suited for evaluating these projects?).
Which option will you recommend from a Finacial perspectir,e? Why?
Which option will you recommend from an Economic perspective.? Why?
)
c)
Alte
etive Ac(ionmenl - ?Ol R
d) Would you recolnmendation change if expected inflation over the usef,rl lives of these projects
is 5%o?
e) What is the basis for analysis/comfarison of costs
enefrts - 'Real terms' or Nominal terms'?
Provide justification in support of your answer.
Assumption/Other Information
i. Options A and B are comparable in term of their electricity gene,rating capacities. Both options
generate 2000Mn units of electriciqv annually.
2. Electricity is priced in the market at 20c per unit. However consumers are willing to pay 30c
per unit.
3. All capital costs are inc
d at time t :0. (ie, ignore project construction time).
4. Electricity generated, elec
icity tariffs, annual costs and the discount rate remain constant
through the usefirl lives of the projecs.
5. Market prices may be used wherever information is not adequate to calculate economic prices.
6. Economic and financial discormt rates (exclusive of inflation and escalation) are the same, ie
t0%.
1
Alre
ative Assiqn
ent - ?01 R
15
Assignment 2 – A 2018
1
UNIVERSITY OF TECHNOLOGY SYDNEY
Faculty of Engineering and Information Technology
XXXXXXXXXXECONOMIC EVALUATION
Autumn 2018
XXXXXXXXXXAssignment # 2
XXXXXXXXXXDue: 4 June 2018 (no later than 4.00 pm)
Notes:
1. This assignment is worth 25% of the total score.
2. The Answer Sheet for this assignment should be uploaded using the appropriate
link on UTSOnline.
Assignment 2 – A 2018
2
EVALUATION OF PROJECT PROPOSALS
Everyone is impressed by the ingenuity shown by you in evaluating Proposals A and
B from a macro perspective (Assignment #1). So much so, you have been invited,
once again, for a further analysis of the two project proposals. 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.
Assignment 2 – A 2018
3
Notes:
• You must provide the background details (i.e., select calculations), for various
answers provided by you in the answer-sheet, in an Annexure (no more than two
pages). You must type-write your Annexure. You must not attach any computer-
printed spread-sheet in the Annexure. The minimum permissible font size for the
Annexure is 12 (Times Roman or equivalent).
• The completed answer-sheet must however be a stand-alone document (i.e., the
eader should be able to understand the entire logic behind your reasoning without
needing to refer to the Annexure.
• There is no tolerance on specified word/page limits. Any written material beyond
these limits will not be marked.
• Please tick (√) only one box wherever a multiple choice is provided.
Assumptions (common to both proposals)
• All capital costs are incu
ed at time t=0 (i.e., ignore project construction time).
• For financial evaluation, electricity generated, electricity tariffs, annual costs and
the discount rates remain constant throughout the economic lives of the projects.
For economic evaluation, these entities remain constant for the duration of each
market structure (i.e., monopoly, oligopoly, and competition).
• The economic (social) costs and benefits must be estimated exclusively from
Figures 1 and 2. The costs and benefits represented in these figures are all
inclusive, i.e., total costs include capital and operating costs and the demand
curves reflect all benefits provided by the projects.
• For the purpose of estimation of economic (social) costs and benefits assume that
the market structure for electricity sector is cu
ently monopoly. It is expected to
emain so for the first twenty years of the project life-span. The government
however proposes to transform this market initially into an oligopoly (for the years
21 to 40) and eventually competitive (years XXXXXXXXXXWhile it is difficult to
precisely estimate the price and quantity outcomes that will prevail in an oligopoly
market, the economic
ains of the time have suggested that these outcomes are as
shown by dotted lines in Figures 1 and 2.
• The real annual discount rate is 10 percent. Annual inflation is expected to be 5
percent and escalation (due to the scarcity of coal as fuel for electricity
generation), 3 percent. Further, the economic and financial discount rates are
assumed to be the same.
Assignment 2 – A 2018
4
Figure 2 Economic (Social) Costs and Prices: Proposal B
Figures 1 and 2 are Not-to-scale. Therefore, please do not use these figures to
estimate various areas. You should instead use various values on X and Y axes to
estimate various areas.
P = MC=ATC
Marginal Revenue
Demand
Cents/unit
15
12
6
36,000 45,000
Output (Million units/year)
9
40,500
P = MC=ATC
Marginal
R
Demand
Cents/unit
12
8
4
40,000 50,000
Output (Million units/year)
6
45,000
Figure 1 Economic (Social) Costs and Prices: Proposal A