Question

The City of G is considering building a light rail transit (LRT) system similar to the one recently constructed in City KW. You have been asked to conduct a cost benefit analysis of the project. You have some data about the KW LRT project:

Present value of annual net benefits (to KW residents) =$620 million

Construction costs (paid by KW residents) (t=0) =$820 million

Grant from the provincial government (t=0) =$300 million

Grant from the federal government (t=0) =$250 million

A KW analyst estimated the net present value of the project for KW to be +$350 million. An independent analyst argued that the net present value was closer to -$200 million. Define the concept of “standing” and use this concept to help explain the difference in the net present value estimates.

Answer 1

Concept of Standing basically involves the question of "who has standing" and is used to measure the impact on all stakeholders who have significant investment into the project. In this case of grants from Provincial and Federal Government but benefits accruing to only the region of KW, it beomes comple to determine who has standing.

For KW residents specifically,

Benefits accrued = 620M

But Cost to KW Residents = $820M- $300M-$250M = $270M

Hence, any Analyst from KW will only consider the cash flows invested by the KW residents for any form of cost benefit analysis, making the net present value to 620M- 270M= 350M

350M is NPV standing from the point of view of KW Residents.

Now, from the standing of an independent analyst, he will only consider the inflow and outflow for the Project only. Think about it as if independent analyst is standing in from the point of view of Federal Government - As Federal Government is in some sense paying the amount granted by Provincial Government (since it ultimaltely comes fom taxes paid by KW citizens in some form or other) as well as the cost paid by KW citizens, the total cost borne by the Government for the Project is 820M and benefits acrrued are only 620M,

Hence, from the standing of an independent view: net npv = 620M- 820M= -200M

This explains the difference in NPV because of observation from different standing points.