Reference no: EM132654333

Question - A Queensland firm sets up a manufacturing plant at a Queensland town near the Queensland-NSW border. The project needs some specialized technical expertise and thus the firm engages the help of a foreign organization at a fee of $2000. It hires a project manager from NSW at a cost $1500, whose opportunity cost is $700. It purchases materials worth $3000 exclusive of a 10% indirect Goods & Service Tax (distortionary, materials are in addition to current supply), which is paid to the federal government, and hires otherwise unemployed local labor at a wage of $1000. Depreciation on the firm's capital equipment is $95 and it also pays $55 interest on an unrelated preexisting debt to a Victoria based bank. The project generates revenue worth $9000, net employment benefits of $600 for the labor, a positive externality worth $300 by reigniting the town's economy, and causes pollution affecting Queensland and NSW residents worth $500 and $350 respectively. The firm pays a company tax of $200 to the Queensland government and shares the remaining profits on an 80:20 basis with the foreign organization (keeping the higher share for itself). Assuming there are no other benefits and costs, all values are present values, and Queensland entities as the referent group, answer the following:

a) Consider the statement: As depreciation and interest expenses are a part of a firm's operating costs in an accountant's profit and loss statement, we need to include both of them in Market as well as Private Analysis while doing the Discounted Cash Flow analysis. State if this statement is True, Partially True (for e.g. either one or both of the expenses need to be included in one or both of the Analysis), or False. If the statement is Partially True or False, state why and modify the statement as appropriate. Explain your answers clearly

Calculate the:

b) Market benefit-cost analysis

c) Private benefit-cost analysis

d) Efficiency benefit-cost analysis

e) Referent Group benefit-cost analysis by:

i) Aggregate (residual method)

ii) Disaggregate

f) If the Queensland government (on its own) needs to compensate the NSW residents for the pollution caused, will it be likely to give the greenlight to the project? Explain

g) In the above question (f), if the federal government transfers1/3rd of its GST revenue to the Queensland government, how will this affect the Queensland government's decision? Explain.