ECON3220/7740 Case Study Applied Cost-Benefit Analysis代写

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  • ECON3220/7740 Case Study Applied Cost-Benefit Analysis代写

    ECON3220/7740 Case Study Assignment in Applied Cost-Benefit Analysis, Semester 2 2017
    Alternative Sources of Water Supply Augmentation for South East Queensland
    Project Outline
    The Department of Water Resources (DWR) is planning to increase South East Queensland’s
    urban water supply to meet the anticipated extra demand over the 24 year period from 2021 to
    2044 inclusive. Demand is expected to rise from the anticipated 2020 level of 900,000 megalitres
    per annum (ML/a) in equal annual increments of 9,000 ML/a to a total of 1,116,000 ML/a in 2044.
    DWR is considering a proposal to construct a dam on the Katherine River in the years 2019 and
    2020 which would provide a yield of up to 150,000 ML/a. This would meet the anticipated
    additional demand in the years 2021 to 2034 inclusive. In 2034 the dam wall would be raised
    thereby providing a further yield of up to 66,000 ML/a which would meet the anticipated extra
    demand until 2044.
    DWR does not have desalination technology or expertise, but an Italian company, Acqua
    Salato (AS), has suggested an alternative way of meeting the anticipated extra demand for water. It
    proposes to build a series of four desalination plants, each with a capacity of 54,000 ML/a. Plants
    1 and 3 would be built with extra tunnel and pipeline capacity which would be utilized by Plants
    2 and 4. The plants would each take two years to construct and would be built so as to become
    operational in 2021 (Plant 1), 2027 (Plant 2), 2033 (Plant 3) and 2039 (Plant 4). AS would
    operate as a commercial company and would sell the water it produced to DWR. At the end of
    2044 AS would sell the desalination infrastructure to DWR at an agreed price.
    In order to maintain capacity and the additional 216,000 ML/a water supply provided by each
    option, further expenditures by DWR would be required in the period 2045-68 inclusive. The
    dam and its extension would require a capital refurbishment program, the equipment comprising
    the interconnection network and the water treatment plant would have to be replaced at some
    stage and the annual fixed and variable operating costs would be incurred. If the desalination
    option were chosen DWR would bear the costs of replacement of plant and equipment and the
    annual fixed and variable costs of the plants. At the end of 2068 the economic life of both
    projects will be over.
    You have been engaged as a consultant by DWR to evaluate the AS proposal from the viewpoint
    of the State of Queensland: DWR wishes to know which of the two proposals is the least-cost
    method of supplying the additional demand in the period 2021-2044 and maintaining that supply
    in the subsequent period 2045-68. Your recommendation will be either to accept the AS proposal, or
    to reject it and proceed with the Katherine River dam project. Note that the State Government
    expects to receive from the Commonwealth 30% of any additional GST revenues generated in
    Queensland as a result of either project. Present values are to be estimated at 3%, 5% and 7% real
    rates of discount.
    The estimated costs of the two projects are detailed below. All costs reported are in 2019 AUD.
    The Katherine River Dam Project
    Capital Costs
    It is estimated that 3% of all capital costs reported here consists of Goods and Services Tax
    (GST) payments.
    Initial Capital Costs
    2019  2020
    Dam  1275  1275
    Pipelines and Pump Stations  426  426
    Water Treatment Plant 
    Plant  18  18
    Equipment  75  75
    Storages  7.5  7.5
    Year  2023  2028  2033  2038  2043  2045-68
    Capital Refurbishment ($ Millions)* 0.21  1.2675  0.8925  3.2925  0.495  30pa
    * Refurbishment costs are inclusive of the additional costs to raise the level of the dam in 2034.
    Operating Costs
    Annual fixed and variable costs in the year 2021 together with their composition and tax
    components in that year are shown below. The labour, energy and materials proportions apply to
    both the Fixed Annual Cost and the Variable Cost.
    Operating Costs
    Fixed Annual Cost ($ Million/pa)  27.00
    Variable ($/ML)  337.5
    Labour (Proportion)*  0.6
    Energy (Proportion) **  0.15
    Materials (Proportion) **  0.75
    * Includes 4.5% Payroll Tax
    ** Includes 15% GST
    The Desalination Project
    Capital Costs
    It is estimated that 3% of all capital costs reported here consists of Goods and Services Tax
    (GST) payments.
    Capital Costs ($ Millions)
    Year  2019  2020  2025  2026  2031  2032  2037  2038
    Tunnels and Marine Infrastructure  240  240  0  0  240  240  0  0
    Plant, Buildings and Equipment  375  375  264  264  375  375  264  264
    Land Acquisition  7.5  0  0  0  7.5  0  0  0
    Pipelines, Pumps and Tanks  142.5  142.5  0  0  142.5  142.5  0  0
    In addition to the capital costs reported above, capital expenditures of $30 million per annum will
    be required in the years 2045-68 inclusive for refurbishment of the plant and related
    Operating Costs
    Fixed annual costs and variable costs for each Plant, together with the composition of
    costs (calculated at 2019 prices) and the tax components.
    Operating Costs of each Plant
    Fixed Cost ($ Million/pa)  33  15  33  15
    Variable ($/ML)  525  525  525  525
    Labour (Proportion)*  0.4  0.4  0.4  0.4
    Energy (Proportion)**  0.3  0.3  0.3  0.3
    Materials (Proportion)**  0.3  0.3  0.3  0.3
    * Includes 4.5% Payroll Tax
    **Includes 15% GST
    The Acqua Salato (AS) Venture
    Acqua Salato (AS) will borrow $650 million at a 6% real rate of interest from an overseas bank in
    2019. The loan together with interest will be repaid in equal annual amounts, in the form of an
    annuity, over the 15 year period starting in 2020.
    AS will sell to DWR the water it produces at a price of $5750 (2019 dollars) per ML. It will pay
    33% business income tax on its earnings net of operating costs, interest payments and depreciation
    allowances (assume that AS can deduct any losses against taxable income from its other
    Australian projects):
    Item Years
    Tunnels and Marine Infrastructure 40
    Plant, Buildings and Equipment 30
    Pipelines, Pumps and Tanks 25
    Depreciation allowances can be claimed using the straight line method starting in the year 2021
    (Plant 1), 2027 (Plant 2), 2033 (Plant 3) and 2039 (Plant 4). At the end of 2044 AS will sell its
    desalination plants to DWR for a surrender value of $200 million (2019 dollars), which will be
    subject to business income tax. AS says that it requires a real rate of return of 10% on the project if
    it is to proceed.
    Labour Market
    There is very low unemployment in Queensland, especially in the construction industry, but it is
    expected that job vacancies can be filled by migrants from other States.
    Cost of Energy
    A consultant estimates that the energy price will rise at a rate 1.5% above the general rate of price
    inflation, starting in 2022, over the period until 2044. From 2045 onwards the energy price is
    expected to follow the general rate of price inflation.
    External Costs
    Both projects are thought to involve significant external costs.
    The Dam Project involves flooding the Katherine River Valley with consequent loss of recreation
    facilities and wild life habitat. The Katherine River is home to a rare species of lungfish, together
    with other animals such as platypus, crayfish and frogs. A Choice Experiment valuation study
    undertaken by a consultant from the local university estimated the annual cost of the inundation
    of the valley (to users and non-users) between $100 and $200 million (2019 dollars) starting in
    2021. 1
    The Desalination Project produces highly saline water as a waste product and it is proposed to
    release this as a brine trail into the ocean with consequent damage to marine ecosystems in the area
    of release. Assuming that the volume of waste product is proportional to the volume of water
    produced and the amount of damage is proportional to the volume of waste, the consultant has
    estimated an environmental cost between $200 and $400 per ML of water produced (2019 dollars)
    starting in 2021. 1 Concerns have also been voiced about the loss in visual and recreational amenity
    in the vicinity of the desalination plants, but these have not been quantified.
    The Dam Project may provide some benefits in the form of flood mitigation, but the Desalination
    Project may be a more reliable source of supply in the immediate future. No attempt has been
    made to quantify these effects.
    1 For the initial, base case scenario, use the mid-point between the lower and upper estimates.
    On behalf of the Government of Queensland, you are required to undertake and report the findings
    of a cost-benefit analysis of the Katherine River Dam and AS Desalination proposals. The analysis is
    to be reported in millions of 2019 Australian dollars, to two decimal places, with present values
    in year 2019 to be calculated.
    Since the government of Queensland is mainly interested in the costs to Queensland of the two
    proposals for meeting SE Queensland’s additional water supply needs into the middle of the century,
    the costs reported in the Market and Efficiency Analyses, and in the Department of Water
    Resources (DWR) section of the Private Analysis, are to be entered as positive numbers. In the
    Acqua Salato (AS) section of the Private Analysis the usual convention is to be followed, with
    revenues entered as positive numbers and costs as negative numbers. In the Referent Group Analysis
    costs to Queensland are to be entered as positive numbers (with any incidental benefits to
    Queensland entered as negative costs), and net benefits to other groups are to be entered as positive
    numbers. These conventions must be borne in mind in summing the overall effects of the two
    You should summarize the results of the Market, Private, Efficiency and Referent Group analyses by
    calculating and reporting NPVs, with the NPV for the Referent Group reported on an aggregated and
    disaggregated basis. The costs calculated in the Market and Efficiency analysis should also be
    expressed on a per ML basis in the Summary Table of Results. The IRR for the Private analysis
    of the AS Project should also be reported, and the impact of the proposals on DWR’s budget
    estimated. The government generally uses a 5% discount rate (real) for investment decision-making,
    but is interested in knowing the sensitivity of the results at 3% and 7% discount rates. The
    government also wishes to be advised about the viability of the desalination proposal from AS’s
    You should also conduct and report the results of a sensitivity analysis, including the derivation of
    the threshold values at which the present values of costs would be the same for the two options. You
    are required to calculate and comment on the sensitivity/threshold analyses for, at least, the following
    three variables: (i) the expected increase in the real price of energy, (ii) the likely external costs of the
    projects; and, (iii) the commercial price of water. You are encouraged to explore the sensitivity of the
    results to a small number of other variables with a view to identifying those that have most impact on
    the results and that would warrant further investigation.
    In your report you should also indicate if there are any omitted costs and benefits that could be of
    potential significance to the decision-maker and might warrant further investigation.
    Assignment Format and Submission
    Two Files to be submitted:
    (i) CBA Analysis in Excel Workbook, and; (ii) CBA Report in PDF
    Excel Workbook
    In constructing your CBA spreadsheets you are required to use the template Excel Workbook
    downloadable from Blackboard. You should not change the structure of the template tables in
    the spreadsheets unless requested by an instructor to do so, with the exception of the Summary
    Results sheet to which you may add additional summary tables including results of your
    sensitivity and threshold analysis. Precise details of the assumed values for variables in the
    sensitivity analysis should be clearly stated alongside the results tables to allow the markers to
    replicate your reported results. (If you require additional tables and working space for generating
    your sensitivity and threshold analysis results these can be added to an additional spreadsheet at
    the end of your Workbook with a clearly labelled ‘tab’.) NO ADDITIONAL EXCEL FILES
    All Excel analysis and reporting of results should be conducted in 2019 prices in millions of
    dollars to two decimal places.
    You are required to enter your name and student ID number in the space provided at the
    top of the ‘Summary Results’ sheet in the template Excel Workbook.
    CBA Report
    Your written report should not be more than 12 pages in length, including the Executive
    Summary and tables. It should be on A4 size pages (portrait orientation only) in PDF format, 12-
    point Times New Roman font, 1.5 spacing, 2.5 margins on all sides. Penalties apply for excessive

    ECON3220/7740 Case Study Applied Cost-Benefit Analysis代写
    The report should provide a Front Page containing name, student number, etc. This is not
    included in the page limit. The Report should begin with the Executive Summary of no more
    than one page. Results of the all project options and sensitivity analyses should be reported in
    summary tables included in the text, and where necessary, in more detailed tables in an Appendix
    (not included in 12 pages). Do not attach copies of spreadsheets (e.g. in PDF) to your main
    report, although sections showing summary results can be cut-and-pasted into the report.
    Your report (in PDF format) plus your Excel Workbook file should be submitted
    electronically via Blackboard (Bb) by 23.59 pm 16 October 2017. (Maximum 2 submissions
    You may submit only one Excel Workbook file, containing all relevant spreadsheets should be
    formatted in landscape in normal view, and left unlocked so all calculations and sensitivity testing
    can be checked.
    Your Excel file must be named: DESAL_[your family name]_[your student ID number]
    A. Late penalties: See below and ECP for further details of the marking criteria and weights and
    the penalties for late submission.
    B. Feedback on work in progress:
    (i)  Electronic files containing work-in-progress in spreadsheets should not be e-
    mailed or brought to instructors for uploading to their PCs. We can provide assistance
    during the lab sessions or we can comment on spreadsheet files (in the template format
    only) which are printed out or are accessible on student’s own laptops during consultation
    and lab times; and,
    (ii)  We will not agree to read and comment on draft reports before the submission
    dates; however, general guidance on the direction and structure of the reports will be
    provided, including the lecture “Guidelines for Preparing a CBA Report” and through the
    Discussion forum in Bb.
    Weighting of marks for Case Study Assignment
    Overall weighting in final mark 30%
    Total assignment mark 100
    1.  Excel-based CBA (20/100)
    2.  Written Report (80/100)
    Breakdown of marks:
    – Statement of approach and methodology: 10 marks
    – Presentation and discussion of results: 40 marks (10 marks for Excel analysis)
    – Presentation and discussion of sensitivity/threshold analysis: 40marks (10marks for Excel
    – Conclusions and recommendations: 10 marks
    – Minus late penalties (5 marks deducted per day overdue.)
    Associate Professor Richard Brown
    School of Economics
    August 2017
    ECON3220/7740 Case Study Applied Cost-Benefit Analysis代写