Economic projects
Introduction
Economic projects appraisal methods includes a wide range of economic and financial costs and
benefits that are key to achieving and satisfying both economic and financial demands of
particular group of people. To evaluate an investment financially, the NPV (Net Present Value)
and the IRR (Internal Rate of Return) are applied. A project with a negative NPV should be
rejected only projects with positive NPV should be accepted. The rate of IRR depends on
individual projects. Economic evaluation takes into account the best value for money, (VFM).
The methods used are the Cost-benefit analysis and the cost effective analysis.
1.
Economic Project’s Benefit
Value of Gas saved 70,102,090,600
Benefits of reduced traffic
accident
1,168,870,758
Benefits of improved air quality 2,025,000,000
Benefits of travel time saved 49,319,441,265
Total project benefits 122,615,402,624
Financial Projects Benefit
Total Train fares in 30 Yrs 21,252,683,826
Initial Project Costs 280,000,000
Annual Projects fixed Costs 2,430,000,000
Annual Projects variable Costs 44,387,497,139
Cost of Traffic Delay 6,521,003,125
Property Compensation 352,500,000
Total Projects Costs 53,971,000,264
With Project Without Project
Annual Car Pt 14,430,981,950 2,851,634,870
Annual Bus Pt 3,607,745,487 391,260,188
Annual Train Pt 0 14,795,832,380
Total 18,038,727,437 18,038,727,437
The differences in the analysis stem from the different aspects of cost analysis. The financial
aspects of the cost refer to the direct costs and benefits the project will attract to the suburbs of
homestead and its environs. The MTDA will require funding in order for the construction of the
rail transport to be completed. These costs amount to $53,971,264 which will be utilized in its
construction, implementation and the general maintenance of the project in the next 30 years.
The total income expected to be generated from the project in terms of fare or transport charges
amounts to a total of $21,252,683,826.
The other analysis explains the indirect benefits of the project. The project will lead to a
reduction of fuel usage which will amount to over $70,102,090, 600 worth of fuel saving in 30
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years. The other benefits are clean air estimated to cost 2,025,000,000 in terms of related
benefits, travel time saved $49,319,441,265 and reduced rate of accidents valued at
$1,168,870,758. All the benefits that will be achieved as a result of the MDTA are valued at
$122,615,402,624. These are also known as the economic benefits of the projects.
- The opportunity cost is the cost of the best alternative that has been forgone to achieve the
desired result given a limited number of choices. The concept expresses the relationship between
scarcity of a particular product and the preferred choice. It ensures efficient utilization of the
scarce resources. The construction of the MDTA ensures that the economy of the Southwest
Dade and Homestead is impacted positively by the expansion of the rail services. The
opportunity cost of the construction of the is the continued existence of the PT which includes
the cost of air and noise pollution, property compensation, traffic congestion cost and the cost of
accidents which amounts $122, 615,402,624.00.
The non-market benefits are the non financial benefits that will accrue to the community as a
result of the project upon its completion and it amounts to $122,615,402,624. The non-market
benefits are also known as Economics’ benefits. (Nitzan and Bichler 33)
With and without principle is applicable apply to the social and financial benefits that will accrue
to the respective community on the completion of the project. The marginal benefits and the
precautionary principle (156) are almost balanced in terms of private transport which amount to
$18,038,727,437. (Hanley, Shogren and White 21)
With Project Without Project
Annual Car Pt 14,430,981,950 2,851,634,870
Annual Bus Pt 3,607,745,487 391,260,188
Annual Train Pt 0 14,795,832,380
Total 18,038,727,437 18,038,727,437
The operation and maintenance costs amount to $46,817,497,139 and it includes the projects
fixed and variable costs. They represent the marginal costs of the project.
Initial Project Costs 280,000,000
Annual Projects fixed Costs 2,430,000,000
Annual Projects variable Costs 44,387,497,139
Cost of Traffic Delay 6,521,003,125
Property Compensation 352,500,000
Total Projects Costs 53,971,000,264
The rail transport system is a Public good (Powel 352) whose cost amounts to $53,971,000,264
and it’s expected to generate $21,252,683,826 in terms of revenue. But significantly it’s expected
to impact more on the economic aspects of growth like for example on the economy’s GDP and
improved living standards.
Damage compensation for the MDTA project amounted to $352,500,000 and it’s the property
compensation costs that are also part of the opportunity for the project.
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- The internal rate of the project is the actual rate at which the projects NPV’s are Zero. The
economic benefit aspect of the project’s internal rate of return is 20.141% but the financial aspect
of the project which is the most critical one of the two is infinity. It’s potentially uneconomical in
all aspects of financial calculations. The following are the results for Project when the IRR is
20.141.
Variables Financial Economic
B-C Analysis B-C Analysis
PV Benefits 1,778,709,502 10,076,214,588
PV Costs 5,033,702,962 10,076,213,096
NPV -3,254,993,460 1,492
B-C Ratio 0.35 1.00
IRR Infinity 20.141
4.
The Final results for the Projects cost benefit analysis:
Final Results:
Variables Financial Economic
B-C Analysis B-C Analysis
PV Benefits 4,742,684,831 26,987,141,613
PV Costs 11,900,754,648 17,576,808,837
NPV -7,158,069,817 9,410,332,777
B-C Ratio 0.40 1.54
IRR Infinity 20.141
Financially, the NPV of the project is negative when the rate is pegged at 10%. The NPV is
(negative) -7,158,069,817. The project is financially unviable. The total income expected from
the project is $21,252,683,826 while the total costs incurred to construct and maintain the project
is $53,971,000,264. The deficit is $32,718,316,438. The Present value of its financial total
income is 4,742,684.831 while its financial total costs $11, 900,754,648. A negative difference
of $ -7,158,069,817. The B-C ratio 0.4 while the IRR is infinity.
Economically, the NPV of the project is Positive when the rate is pegged at 10%. The NPV is –
9,410,332,777. The project is economically viable. The total benefits expected from the project
are 122,615,402,624 in terms of value of gas saved, reduced accidents, improved quality of air
and the benefits of travelling while the total costs implication for the project $352,500,000, the
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cost of property compensation as part of the population has to be relocated to provide the
required land for the rail construction. The difference of the revenues and costs expected from
the project is $122,262,902,624. The Present value of its economic total benefit is
$26,987,141,613 while its economic total costs $17,576,808,837. A positive difference of $
9.410,332,777. The B-C ratio 1.54 while the IRR is 20.141
The results reveal that the project is economically viable as the economic benefits outweigh its
marginal costs. The project will provide a lot of social and environment benefits that will provide
better living conditions for the residents. A positive NPV indicates that the project is viable and
should be recommended.
The benefits of the MDTA projected should be weighed carefully before a final decision is made.
The project provides a lot of economic and environment benefits but financially it will be a loss
making venture. With a negative NPV and an infinity as IRR, its highly unprofitable while
economically its NPV is positive while its IRR is impressive at 20.141, it’s highly recommended.
Various methods have been used to evaluate the project from various aspects. The B-C ratio
relates to its overall benefit to the society while the IRR and NPV mostly relate to its financial
viability. A combination of the three methods presents an inclusive perspective about the project.
- The major funding option for such a big project may include sale of shares or bonds. Issuing
bonds is one way of raising money without actually selling any ownership rights. It’s a loan that
is in the form of debt security. The borrower or the bond issuer owes the bondholder the debt
together with the coupon or the interest that is repayable together with the loan. The collateral
can be the company’s land, buildings or any other asset.
The other way of raising financing is through the sale of shares in the stock exchange. The
company has to be listed then it can be allowed to sell its shares to the public.
References
Hanley, N., Shogren, J. and B. White, Environmental Economics in Theory and Practice,
Palgrave, London, 2007. pp. 21
Nitzan, Jonathan and Bichler, Shimshon, Capital as Power. A Study of Order and Creorder.
RIPE Series in Global Political Economy, New York and London: Routledge, 2009.
Powel , Ray “10: Private goods, public goods and externalities”. AQA AS Economics (paperback
Ed) Philip Allan, 2008, p. 352.
