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# 49003 ECONOMIC EVALUATION

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49003 ECONOMIC EVALUATION

Assignment # 2 (Autumn 2018)

Due: 4 June 2018 (no later than 4.00 pm)

 Financial Economic Proposal A Proposal  B Proposal A Proposal B NPV IRR PB B/C Equivalent Annual Cost Consumer Surplus Producer Surplus Total Surplus

Note:  NPV; Equivalent Annual Cost; Consumer, Producer, and Total Surplus - must be rounded off to the nearest billion dollars (i.e., no decimals), and IRR and PB - to the nearest ‘whole’ percent and years (i.e., no decimals), and B/C - to one decimal point, respectively.

1.      Which proposal will you recommend from the investor’s perspective? (2 Marks)

Why? Because _____________________________________________________________

________________________________________________________ (no more than 10 words)

2.      Will your recommendation, based on economic perspective, change if – due to unanticipated economic reasons – there is hyperinflation after the first twenty years of the project life span? (2 Marks)

Why? Because _____________________________________________________________

________________________________________________________ (no more than 10 words)

3.      Will your recommendations, based on economic perspective change if the government fails to convert the monopoly market into oligopoly and competitive markets (i.e., the market will remain a monopoly throughout the project life spans)? (2 Marks)

Why? Because _____________________________________________________________

_______________________________________________________ (no more than 10 words)

4.      Will your recommendation (based on financial perspective) change if evaluation is carried out in future value terms rather than present value terms. (2 Marks)_____________________________________________________________

________________________________________________________ (no more than 10 words)

5.      Is there a co-relation between Life Cycle Cost and Equivalent Annual Cost? (3 Marks)

Yes                                       No

Why?  _____________________________________________________________

________________________________________________________ (no more than 10 words)

6.      In Figure 2, the monopoly price is 12 cents per unit. Will the response of demand to price increase beyond 12 cents per unit (i.e., higher than 12 cents per unit) be elastic or inelastic?  (3 Marks)

Elastic                   Inelastic

Why? Because _____________________________________________________________

________________________________________________________ (no more than 10 words)

7.      Prices are generally lower in competitive markets as compared with those in monopoly markets. Producers however argue that low prices do not enable them to receive adequate returns on their investments. To counter this, the governments oftentimes – especially in the case of essential commodities (for example, electricity) - provide direct subsidies to the monopoly producer. Such subsidy is justified on the ground that it will improve community welfare. What is the total value of subsidy (expressed in present value terms) that the government will need to pay for Proposal A in order to encourage the producer to produce at competitive market levels of production? (3 marks)

8.      Sensitivity analysis can be used to determine how the viability of a project is influenced by over- or under-estimation of various input variables. Assume that Total Surplus is used as the criterion for assessing the viability of Project A. What is the ‘switching value’ of ‘capital cost’ for this project? (3 marks)

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