An inland river system is in need of rehabilitation to reduce the salinity level
ID: 1190079 • Letter: A
Question
An inland river system is in need of rehabilitation to reduce the salinity level in water and remove blue green algae. The rehabilitation scheme involves a program of surface and ground water seepage interception and treatment to remove salt and nutrients, as well as tree planting and other measures, costing around $60 million with an annual operating cost of $5 million over a 25 year period. If this scheme is not implemented it is estimated that the local agricultural production (worth $25 million currently) will suffer by 3% drop in production starting in the coming year (year 2 will be 6% loss, year 3 will be 9% loss and so on). If the rehabilitation proceeds it will make the river an attractive destination for vacationers. The development of vineyards will also follow. Overall, if the rehabilitation goes ahead, it will generate tourism and related activities (in addition to prevention of agricultural losses) worth $10 million in year 1, rising by 5% annually (year 2 will be 10.5, year 3 will be 11, year 4 will be 11.5 and so on). a. Determine if it is worthwhile to rehabilitate this river. The MARR is 6% per annum. b. To partially reduce the total cost of constructing and operating this facility it has been decided to charge the users and farmers, and collect from them an amount equal to 30% of the total benefits accruable to them under the above scheme. Re-compute the benefit-cost ratio and compare the outcome with the previous case. What is your recommendation?
Explanation / Answer
a) The worth of the project is determined by future worth method. Future costs = future value of implementation cost + future value of operating cost
So total future cost = $290,782,171.1
Now future benefit is = Future benefit by agriculture + future benefit by tourism
So total future benefits are = $1,284,689,087.5
As we see that benefit is more that cost so the project is viable
b) Now total benefits reduces to $899,282,361, the benefit cost ratio i.e. total benefit/total cost also reduces from 4.4 to 3.1 so this method is not recommendable.
No of Years Annual Operating Cost Future value 25 5000000 21459353.6 24 5000000 20244673.2 23 5000000 19098748.3 22 5000000 18017687.1 21 5000000 16997818.0 20 5000000 16035677.4 19 5000000 15127997.5 18 5000000 14271695.8 17 5000000 13463863.9 16 5000000 12701758.4 15 5000000 11982791.0 14 5000000 11304519.8 13 5000000 10664641.3 12 5000000 10060982.4 11 5000000 9491492.8 10 5000000 8954238.5 9 5000000 8447394.8 8 5000000 7969240.4 7 5000000 7518151.3 6 5000000 7092595.6 5 5000000 6691127.9 4 5000000 6312384.8 3 5000000 5955080.0 2 5000000 5618000.0 1 5000000 5300000.0 Total future value of operating cost 290781913.6