Question

1.       The government of Philippines is proposing a new program to encourage banana farmers to reduce their use of chemicals. Let us assume the present cost of the program as 1,000,000 pesos per participant. The benefits of the program are the reduction in environmental cost estimated at a present value of 4, 000, 000 pesos per participant.

However, the number of farmers that will participate in the program is not known with certainty, and the success of the program in reducing environmental cost is also uncertain.

The following table provides 5 scenarios of a number of participants and the probability of achieving the benefits from reducing environmental cost.

Scenario	Program participants	% probability of reducing environmental cost
A	15,000	30
B	18,000	25
C	20,000	20
D	22,000	15

a)      Use the scenario approach of sensitivity analysis to estimate the NPV

b)      Under which scenarios will the project be feasible?

c)      What advice will you give to the government of Philippines on the feasibility of the project?

Answer 1

A. Sensitivity analysis, using data table (from what if analyis in the data ribbon of excel). setting top left corner cell as total reduction in cost of scenario B (G9), then using row input as the number of participants of cell G7 and column input as cell G8.

B.From sensitivity analysis, we can see that only Scenario A and Scenario B are feasible, where the benefits exceed the cost.

C. The advise for the government of Philippines would be to not to undertake the project on a large scale, as we can see that as the number of participants increase, the probability of reducing the environmental cost decreases. As the number of participants increase, the costs will exceed the benefit of environmental costs.