Scribd Logo
Upload

Welcome to Scribd!

  • 103 views

    Unit-5 Eeca wb2 EVALUATION OF ALTERNATIVES

    Uploaded by

    Saravanan G
    The document discusses several scenarios involving evaluating public projects and making inflation adjusted decisions. It provides details on calculating present and annual equivalents, cash flows, benefit-cost ratios, and determining the amount one must save each year to afford retirement under inflation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Unit-5 Eeca wb2 EVALUATION OF ALTERNATIVES

    Uploaded by

    Saravanan G
    103 views8 pages
    The document discusses several scenarios involving evaluating public projects and making inflation adjusted decisions. It provides details on calculating present and annual equivalents, cash flows, benefit-cost ratios, and determining the amount one must save each year to afford retirement under inflation.

    Original Description:

    workbook

    Original Title

    unit-5 eeca wb2 EVALUATION OF ALTERNATIVES

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses several scenarios involving evaluating public projects and making inflation adjusted decisions. It provides details on calculating present and annual equivalents, cash flows, benefit-cost ratios, and determining the amount one must save each year to afford retirement under inflation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    103 views8 pages

    Unit-5 Eeca wb2 EVALUATION OF ALTERNATIVES

    Uploaded by

    Saravanan G
    The document discusses several scenarios involving evaluating public projects and making inflation adjusted decisions. It provides details on calculating present and annual equivalents, cash flows, benefit-cost ratios, and determining the amount one must save each year to afford retirement under inflation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 8

    EVALUATION OF PUBLIC ALTERNATIVES

    1) In a particular locality of a state, the vehicle users take a


    roundabout route to reach certain places because of the presence of a river. This
    results in excessive travel time and increased fuel cost. So, the state government
    is planning to construct a bridge across the river. The estimated initial
    investment for constructing the bridge is Rs. 40,00,000. The estimated life of the
    bridge is 15 years. The annual operation and maintenance cost is Rs. 1,50,000.
    The value of fuel savings due to the construction of the bridge is Rs. 6,00,000 in
    the first year and it increases by Rs. 50,000 every year thereafter till the end of
    the life of the bridge. Check whether the project is justified based on BC ratio by
    assuming an interest rate of 12%, compounded annually.

    STEP-1

    Given:
    Initial investment =
    Annual operation and maintenance =
    Annual fuel savings during the first year =
    Equal increment in fuel savings in the following years =
    Life of the project =
    Interest rate =

    STEP-2
    The cash flow diagram
    STEP-3
    SOLUTION:
    Total present worth of costs = Initial investment (P)
    + Present worth of annual operating and maintenance cost (CP) = P + Cp

    = ________ + _________ * (P/A,12%,15)

    Total present worth of fuel savings (Bp):


    Al = Rs. 6,00,000
    G = Rs. 50,000
    n = 15 years
    i =12%
    Annual equivalent fuel savings (A) = Al + G (A/G, 12%, 15)
    = ________+ ______ (4.9803)
    = Rs _________

    Present worth of the fuel savings (Bp) = A(P/A, 12%, 15)


    = _________ (6.8109)

    = Rs.

    BC ratio =( Bp/ P+ Cp) =

    STEP-4
    CONCLUSION:
    2) A state government is planning a hydroelectric project for a
    river basin. In addition to the production of electric power, this project will
    provide flood control, irrigation and recreation benefits. The estimated benefits
    and costs that are expected to be derived from this project are as follows:
    Initial cost = Rs. 8,00,00,000
    Annual power sales = Rs. 60,00,000
    Annual flood control savings = Rs. 30,00,000
    Annual irrigation benefits = Rs. 50,00,000
    Annual recreation benefits = Rs. 20,00,000
    Annual operating and maintenance costs = Rs. 30,00,000
    Life of the project = 50 years Check whether the state government should
    implement the project (Assume i = 12%)

    STEP-1
    GIVEN
    Initial cost =
    Annual power sales =
    Annual flood control savings =
    Annual irrigation benefits =
    Annual recreation benefits =
    Annual operating and maintenance costs =
    Life of the project =
    i=

    STEP-2
    SOLUTION :
    Total annual benefits = Flood control savings + Irrigation benefits
    + Recreation benefits
    =

    Present worth of the benefits = Total annual benefits * (P/A,12%, 50)


    =___________ * (8.3045)
    Present worth of costs = Initial cost + Present worth of annual operating
    and maintenance cost - Present worth of power sales

    = _________ +_________ * (P/A,12%, 50)

    - __________ (P/A, 12%, 50)

    BC ratio= Present Worth Of Benefits / Present Worth Of The Cost

    STEP-3
    CONCLUSION:

    3) An inland state is presently connected to a seaport by means


    of a railroad system. The annual goods transported is 1,00,00,000 ton km.
    The
    average transport charge is Rs. 30/ton/km. Within the next 20 years, the
    transport is likely to increase by 10,00,000 ton km per year.
    It is proposed to broaden a river flowing from the state to the seaport at a
    cost of Rs. 2,50,00,00,000. This will make the river navigable to barges and
    will
    reduce the transport cost to Rs. 10.00/ton/km. The project will be financed by
    10% bond at par. There would be some side effects of the change-over
    as follows.
    1. The railroad would be bankrupt and be sold for no salvage value. The
    right
    of way, worth about Rs. 3,00,00,000, will revert to the state.
    2. 300 employees will be out of employment. The state will have to pay to
    each of them a welfare cheque of Rs. 48,000/year.
    3. The reduction in the income from the taxes on the railroad will be
    compensated by the taxes on the barges.
    What is the benefit-cost ratio based on the next 20 years of operation? Also,
    check whether broadening the river is justified.

    STEP-1
    GIVEN:
    Life of the project =
    Total cost of the project =
    Annual goods transported =
    Current average transport cost =
    Annual increase in goods transported =
    Compensation for employees =
    Annual compensation (Cl) =
    Annual equivalent initial cost (C2) = P* (A/P, 10%, 20)
    = _______ x 0.1175

    Total annual equivalent cost of the project, CA


    = Annual equivalent initial cost
    + Annual compensation

    STEP-2
    Benefit to the state
    Worth of the right of the way of the railroad to the state
    = Rs. 3,00,00,000
    Annual equivalent of the above amount (Al)
    = __________ * (AIP,10%, 20)
    =__________x 0.1175
    =

    Average goods transported/year =


    =
    Average annual increase in goods transport = .
    Average increase in transportation cost savings/year (G)
    =

    Equivalent annual average transport cost savings (A3)

    = A2 + G(AIG, 10%, 20)


    =

    Total annual equivalent benefits to the state, BA

    =A1+A3

    =
    STEP-3
    BC ratio = (Total annual equivalent benefit / Total annual equivalent cost)

    = BA / CA
    =

    STEP-4
    CONCLUSION:
    INFLATION ADJUSTED DECISIONS

    1) Suppose a 40-year old man is planning for his retirement. He


    plans to retire at the age of 60 and estimates that he can live comfortably
    on Rs. 24,000 per year in terms of today's rupee value. He can invest his
    savings at 15% compounded annually. Assume an average inflation rate of
    9% for the next 30 years.
    What equal amount should he save each year until he retires so that he can
    make withdrawals at the end of each year commencing from the end of the 21st
    year from now that will allow him to live as comfortably as he desires for
    10 years beyond his retirement?
    STEP-1
    GIVEN

    Step A. The estimated future requirement per year in terms of today's


    rupees from his age 61 through 70 is _____________.

    Step B. Modification of the costs estimated in step A.


    The formula which is given below is used to get future equivalent
    of __________ with the inflation of ____% per year (IR-inflation rate).

    F= P(1+1R)N
    TABULATION:
    END OF INFLATED VALUE OF RS __________
    AGE
    YEAR AT THE EACH YEAR END
    21 61 24000*(1+0.09)^21
    22 62 24000*(1+0.09)^22
    23 63 24000*(1+0.09)^23
    24 64 24000*(1+0.09)^24
    25 65 24000*(1+0.09)^25
    26 66 24000*(1+0.09)^26
    27 67 24000*(1+0.09)^27
    28 68 24000*(1+0.09)^28
    29 69 24000*(1+0.09)^29
    30 70 24000*(1+0.09)^30
    Step 3. Now, the calculation of the equivalent amount of cash flow as per
    the requirement is presented.

    The sum of the present equivalents of the year end withdrawals from the
    year 21 to 30 is computed by assuming the end of the year 20 as the base (time
    zero) and it is shown at the end of the year 20 in Fig. 11.2. The method of
    computing the present equivalent of the withdrawals is as follows:
    PW(i = 15%) =

    The annual equivalent amount (A), which should be invested from the end of
    year 1 (age 41) to year 20 (age 60), is computed using the following formula.
    A = F(A/F, 15%, 20)
    =

    CONCLUSION:

    You might also like