Reference no: EM132271162

PART A

This part of the assignment is about the evaluation of two project proposals. The main objective of this analysis is to ascertain the financial and economic viabilities of the two proposals.

Project details are provided below.

Proposal A

Proposal A envisages generation of electricity from water - a hydro-electric project. The useful economic life of this project is estimated to be 50 years. This project is to be located in a remote area, on a parcel of fertile agricultural land with an expected yield (benefits) of $2 billion (bn) over the life of this project. This land, if bought at the prevailing market price, will cost $500mn. Other capital expenditure (project conception, feasibility planning, design, construction, etc.) on this project will be $9.5bn. At the end of project life, project infrastructure will be sold for 18.6 percent of its capital cost. This project will generate 13,070mn units of electricity annually. Electricity will be sold to the public at a tariff of 10 cents per unit. The annual operation and maintenance costs will be 3 percent of the capital cost.

Other economic costs and benefits for this project can be estimated from Figure 1.

Proposal B

Proposal B is a thermal project - electricity will be generated from coal. This project will require a one-off expenditure of $700mn to expand the coal mining capacity of the existing mine near the proposed site. In the absence of this project, the site will be developed into a major industrial complex which will have an expected lifetime (i.e., 25 years) benefit of $4bn. The project site is currently priced at $300mn. Other infrastructure related capital costs for the project are estimated to be $5bn. The annual costs for the project, as a percentage of the capital cost, will comprise: a) operation and maintenance (4 percent), and b) fuel (6 percent). The project will generate 10,508mn units of electricity annually. Electricity from this project will be sold at 12 cents per unit.

Other economic costs and benefits for this project can be estimated from Figure 1.

Task

Your task is simply to summarize the results of your analysis in the answer-sheet provided separately.

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). 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 reader should be able to understand the entire logic behind your reasoning without needing to refer to the Annexure.

- Please tick (√) only one box wherever multiple choice is provided.

Assumptions (common to both proposals)

• All capital costs are incurred at time t=0 (i.e., ignore project construction time).

• Electricity generated, electricity tariffs, annual costs and the discount rate remain constant throughout the economic lives of the projects.

• Market prices may be used wherever information is not adequate to calculate social prices.

• The ‘Apparent' discount rate for hydro-electric project is 13.3 percent. The ‘Real' discount rate for thermal project is 10 percent. Inflation - applicable for both projects - is expected to be 3 percent over the project life.

Figure 1: Economic Cost and Price Structure

PART B

Please review the following articles:

Berkovitch, Elazar and Israel, Ronen (2004) Why NPV Criterion does not Maximize NPV,
The Review of Financial Studies, Spring 2007, Vol.17, No.1, pp. 239-255.
Ross, Stephen A. (1995) Uses, Abuses, and Alternatives to the Net-Present-Value Rule,
Financial management, Vol. 24, No. 3, Autumn 1995, pp. 96-102. Based on your review, please answer the following questions:
a) What is the ‘common theme' that is discussed in each of these articles? (No more than two lines.)

b) What is the overriding perspective offered by each of these articles in relation to the common themes noted above? (No more than two lines for each article.)

c) Do you agree with this perspective? (Yes or No - one word only, for each article.) Provide reasoning in support of your answer. (No more than two lines for each article.)

PART C

Provide a philosophical critique of the concept of ‘Willingness to Pay' as a means to determine economic benefits while evaluating large electricity infrastructure projects (no more than two dot points with each dot point no more than two lines).

PART D

In some cultures, charging of ‘interest' (and its precursor ‘usury') was historically considered undesirable. In some cultures, it still is. The use of interest rate is however commonplace in modern public discourse.

a) Why was/is charging of ‘interest' viewed negatively by some cultures? (no more than three lines).

b) What developments may have contributed to the transformation of the viewpoints on ‘interest' - from being undesirable, to being desirable, to being indeed imperative? (no more than two ‘dot' points, with each dot point no more than two lines).

Attachment:- Assignment.rar