Question

1. River Kisigo flows through an area next to a medium sized city into river Rufiji. During recent years, annual floods have damaged homes in its vicinity at an increased' rate. Average annual flood damages have been estimated to be Tshs 180M at present and are expected to increase by Tshs 12M each year. To contain excessive runoff two proposals have been made. One is to do some channel improvement (CI). Another proposal is to build a storage dam and small reservoir (D&R). Initial cost of CI is Tshs 240M and annual maintenance is expected to be Tshs 18M. Initial cost of D&R is Tshs 960M, annual operation and maintenance is estimated to be Tshs 27M. If the CI is made, average annual flood damages are expected to be Tshs 108M at present and to increase by Tshs 7.2M each year. If the D&R is built, average annual flood damages are expected to be reduced to Tshs 18M at present and to increase by Tshs 3M each year. The D&R will remove certain land from agriculture and possible future development. This dis-benefit, valued at Tshs 20M per year, is partially offset by improved recreational fishing valued at Tshs 10M per year. Using an interest rate of 12% and benefit /cost analysis establish which proposal should be chosen. Make your own assumptions regarding the classification of costs and benefits/consequences.

Answer 1

		ASSUMPTION:
		CONSIDER 12YEAR HORIZON OF THE ANALYSIS
		ANALYSIS OF CHANNEL IMPROVEMENT (CI)
		Discount Rate=12%=0.12
	N	Year	1	2	3	4	5	6	7	8	9	10	11	12
	A	Average annual flood damage without CI	180	192	204	216	228	240	252	264	276	288	300	312
	B	Average annual flood damage WITH CI	108	115.2	122.4	129.6	136.8	144	151.2	158.4	165.6	172.8	180	187.2
	C=A-B	Annual Benefit	72	76.8	81.6	86.4	91.2	96	100.8	105.6	110.4	115.2	120	124.8
	D	Annual Maintenance	18	18	18	18	18	18	18	18	18	18	18	18
	E=C-D	Net Annual Benefit	54	58.8	63.6	68.4	73.2	78	82.8	87.6	92.4	97.2	102	106.8	SUM
	PW=E/(1.12^N)	Present Worth of Benefit	48.2143	46.8750	45.2692	43.4694	41.5356	39.5172	37.4545	35.3802	33.3204	31.2958	29.3226	27.4129	459.0671
		Present Worth Total Benefits	459.0671
		Initial Cost	240
		Benefit Cost Ratio	1.912779719
		ANALYSIS OF STORAGE DAM & RESERVOIR (D&R)
		Discount Rate=12%=0.12
	N	Year	1	2	3	4	5	6	7	8	9	10	11	12
	A	Average annual flood damage without CI	180	192	204	216	228	240	252	264	276	288	300	312
	B	Average annual flood damage WITH CI	18	21	24	27	30	33	36	39	42	45	48	51
	C=A-B	Annual Benefit	162	171	180	189	198	207	216	225	234	243	252	261
	D	Annual Maintenance	27	27	27	27	27	27	27	27	27	27	27	27
	E	Net Disbenefit for removal of land development(20-10)	10	10	10	10	10	10	10	10	10	10	10	10
	F=C-D-E	Net Annual Benefit	125	134	143	152	161	170	179	188	197	206	215	224	SUM
	PW=E/(1.12^N)	Present Worth of Benefit	111.6071	106.8240	101.7846	96.5987	91.3557	86.1273	80.9705	75.9300	71.0402	66.3265	61.8074	57.4952	1007.8673
		Present Worth Total Benefits	1007.8673
		Initial Cost	960
		Benefit Cost Ratio	1.049861731
		CHANNELIMPROVEMENT SHOULD BE CHOSEN
		It has higher Benefit/Cost Ratio