Financial vs economic table & Link impact to valuation Essay Example

Financial vs. economic impacts (Wyaralong Dam Construction)

Contents

Financial vs. economic impacts of constructing the Wyaralong dama

Affect Financial (money) Economic (real)

Labour Labour Time wastage

Materials Market going prices Next best Options

Water quality Commercial fishing lost fish, retained inputs

Benefits

More water supply Extra pay more output

Improved human life $ savings Alternative use of water

(Reduced water shortage)

Improve environmental $ savings More water, good Health

(Reduced medical payments)

Investment Appraisal technique’ Net present value

We will use the NPV appraisal technique to evaluate our project. NPV is the difference between yearly benefit and cost adjusted for the discounting rte and sum over the project useful life. The adjustment for the discounting rate entails the multiplication of the yearly cost, benefit or the net benefit by the discounting factor. The discounting factor is different as per the discounting rate chosen and the project useful life.

NPV of the project (Construction of the Wyaralong dam)

Time is 10years

Project discounting factor is 10%

Estimated Initial outlay is $246000, 000

Estimated Net benefit of the project is $815000, 000

Therefore, the estimated project Cost and Benefit for the project is as follows

Total cost											$ 246,000
Total benefit								$ 100,000	$ 110,000	$ 120,000	$ 815,000
Net benefit										$ 109,500	$ 569,000
Discount factor (10%)
											$ 307,039

From the above NPV Analysis of the project, it is evident that the construction of Wyaralong dam would lead to positive NPV of $307,039. The implication is that the construction of the dam is viable since, it will bring more benefit to the society like constant supply of clean water for basic needs and improved living standards of the people leaving around. As a result, the project must be implemented since, the benefits of contracting the dam is more than the cost.

Cost benefit Analyse of the project (Wyaralong dam)

Cost-Benefit Analysis of Wyaralong dam project Net Present Values in 2016 $ million
	Definition	Valuation	Present Value
Benefits
More water	Cost saving from buying costly water	Cost saved: valued at $10/litre.
Water treatment cost saving	Less time spent in looking for constant supply of clean water	marginal operating costs by amount of water usage per day at 870% water usage per day
Extra use of water	Excess water above the normal litres required in the dam	Water billing fee monopoly that must be shadow pricing.
Economic multiplier effect	Spending by more people as planed creates flow on effect by growht in spending to maintain the dam and water quality	GEM multiplier adjusted to just comprise of usage assets ($455m undiscounted)
Enviroment safety	New dam will ensure that the enviroment is safe for animals living around	Asset value methodology pre-emptive cost Contingency valuation
		sunk cost market price
Dam Development		market price of inputs
Operations	Increased aircraft movements *	market prices
Lost fisheries	The construction of the dam will destroy fish breeding grounds & cloud the water as the construction in progress	approval of recompense Change in value of output
contamination	Water effluence will harm aquatic animals and animals living around the dam for a short period under construction. Water effluence will necessitate sanitization for business users	Loss of aquatic life precautionary cost surrogate cost emergency assessment
Water shortage	Extra cost of buying water	Water cost: valued at $10/litre
Net benefit

Benefits

Passenger time savings

Devoid of the new source of water, the demand for water will grow leading to poor quality of human life because of water shortage and costly water price that will exist which many may not afford. By getting rid of water shortage, the construction of Wyaralong dam will free citizens from water shortage and ensuring that every person gets the cheaply available water.

Valuation techniques

The number of water users is multiplied by the effect of water shortage and is appraised at 10/litre. As a result, water shortage factor was included. The shortage is different between people and class of people in the country, which increase as the demand for water increase and water supply decline as result of non-constant supply of water. The assumption about the new project is that the construction of new dam will ensure that there is constant supply of cheap and affordable water at every one at all time. The number of water uses is estimated to grow. The present value of the project is estimated to be $307,039,000

Water shortage

Devoid of the Wyaralong dam, the growth in the demand for clean and constant supply of water will lead to poor living standard and poor sanitation. By ensuring that there is constant supply of water, it will save life by ensuring that every gets sufficient and quality water at a cheap price.

Valuation technique:

Cost savings (loss of life and poor sanitation)

The construction of new dam will ensure that there is decline in the loss of life because of lack of water and costly water purchase of the existing water supply. The estimates are based on marginal operating cost for the dam with an assumption that the average water capacity of 70% of water storage in the dam is maintained.

Costs

Construction of the dam

The resource employed in the construction of Wyaralong dam depicts some alternative use that is lost to the community when the asset is employed in the dam construction.

Valuation technique: market prices

The construction assets are existing in a competitive market, which are ideal appraisal of the societal worth. In this regards, the market price employed in financial forecasting for the project are used.

Approximates cost of dam construction and associated facilities ($ millions April 2016 dollars)
	Year of outlay
Reclamation
Pavements
Drainage
Fencing-perimeter road
Electrical-airfield lights
Control tower-navigation aids
Staffing Office
• hangars
• car park
• apron
• access road-bridge
Rescue-fire fighting
Relocations
	$200,000				$ 200,000
Contingency
	$241,250				$ 460,190
Multiplier flow-on to Sydney
Employment (no. of jobs)
Dam construction
Multiplier flow-on to Sydney

Present value in 2016 dollars is $307,039 million.

Loss of fisheries

The search in the Botany Bay for materials employed to fill the dam will pollute the water and hence affect the aquatic life. Less fish will be caught in the river in which the dam will be constructed. The loss of assets is because of the construction of the dam by blocking part of the river to save on water.

Valuation technique: market prices

Estimates of annual loss to fisheries
	Value per	Professional		Percentage
					commercial	to amateur
Yellow-finned
Tarwhine
Luderick
Trumpeter
King prawns

Value:

Present value in 2016dollars is $ 650,000.

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