Cost-Benefit Analysis of a Waste water Treatment Project Before you start working on this problem you need to develop some parameters (numbers).
x1= 6
x2= 1
x3=4
x4=2
x5=9
x6=4
x7=4
x8=9
x9= 9
x10=48
Background
The City of Bintuli is a thriving center of commerce and industry in the Republic of Kabastan. The main industries in the area include metal manufacturing, coal extraction, chemical manufacturing, construction, papermaking and food processing. The value of industrial output in 2015 is estimated at $200 million while agricultural output is valued at $16 million. In recent years, the quantities of industrial and domestic effluent discharged into the Nombeng and Weban Rivers, as well as other streams and small rivers in the area, have increased rapidly. According to the Environmental Protection Agency (EPA), total industrial and domestic effluent in the Bintuli is 163,700 m3 /day. Currently, (5 times X4) percent of this effluent is treated by an existing treatment system. The plant is running at its full capacity. All the untreated industrial effluent is currently discharged into the nearby rivers. The daily total industrial and domestic effluent is predicted to increase at an annual rate of (X3/10) percent. It is proposed to build a wastewater treatment facility and associated pumping stations and drainage pipework. The treated water of clean water standard will be discharged into the Nombeng River for use by industry and agriculture. Bintuli, like many cities in Kabastan, is facing serious depletion of groundwater resources and severe pollution of surface water due to insufficient infrastructure available to accommodate the rapidly increasing amounts of industrial and domestic effluent. Currently, the entire untreated domestic and industrial sewage of the city’s effluent is dumped into the Nombeng and other rivers in the area. The river courses in the city have turned black and emit unpleasant odors, creating health hazards.
Continued discharge of untreated wastewater at the current rates will, in time, render the surrounding areas non-viable in economic, as well as social terms. Prospects for sustainable economic development in the area critically depend on the level of wastewater infrastructure development. The city is considering building a new wastewater treatment facility.
Project Costs: All the equipment and construction materials are imported and are valued in US dollars. The Initial Investment Costs and the annual Operating and Maintenance Costs are reported in the following table.
Item== Actual (Market) Costs Incurred ($ million)== Notes
Initial Investment Costs (IIC)
Buildings 0.25 * X10
Equipment and supplies X9 See note 1 below
Land X5 See note 2 below
Operating & Maintenance Costs (OMC)
Electricity 0.25*X1
Salaries X3 See note 3 below
Chemicals 0.1*X5
Maintenance 0.2*X7
TOTAL OMC 0.25*X1+X3+0.1*X5+0.2*X7
Note 1: 25% of the equipment and supply costs ($X9 million) are subsidized by the federal government. Note 2: The market value of land, $X5 million, is 10 percent less than its true value or shadow price. Note 3: Since there is an unemployment problem in the region, the shadow price of salaries paid is 25% less than $X3 million. The construction of the project is expected to take three years, beginning 2008. X10 percent of the IIC will be spent during the first year, 10 percent the second year, and the remaining the third year. The City has decided to borrow all but (X2+X3+X4) percent of the financial outlay of the IIC from a local bank. The balance is going to be re-allocated from other internal sources. The entire principal and the simple annual interests accrued during the first five years must be repaid in 15 equal annual (principal + five year interest) installments beginning sixth year. Along with the principal, simple interest on the outstanding loan balance must be paid annually (beginning sixth year). The interest rate on loan is X9 percent. After 20 years of the project life, the salvage (residual) value of the project is estimated to be 20 percent of the market value of the IIC. This salvage value should be treated as a benefit of the project.
Project Benefits:
The benefits of the project include the revenues raised from user charge (sewer treatment service fees charged to households) and the economic benefits derived from treating wastewater. The economic benefits include the following: reduced mortality, productivity gains from reduced morbidity, water treatment cost savings, sale of recycled water, afforestation benefits and reed harvesting. Each of these benefits are presented below. The new plant will start functioning in the fourth year and its expected life span is 20 years (i.e., 20+3 years of analysis). The city government will charge a user fee of X1 cents/m3 of effluent treated. About 60 percent of the treated wastewater (from the new plant) will be recycled and used for irrigation and industrial purposes. The recycled water sells at 1.2*X1 cents/m3
A portion of the treated water is discharged on a nearby public land owned by the Forest Department. Pine and some hardwood species will be planted on 300 hectares of land. Every five years from the start of the sewer treatment plant, hardwood plantation will be harvested. The net return (revenue minus costs) at each harvest is estimated at $ X4 thousand per hectare. This profit is retained by the Forest Department. A major social impact of the project is the reduction of the incidence of pollution-related illness and hence a reduction in worker absenteeism and reduced medical bill for people of all ages. It is assumed that the current average number of lost days per worker per annum as a result of illness is 2 days. The city’s current population is 300,000, which is expected to grow at a rate of (X3/10) percent per annum. The 40 percent of this population constitutes labor force. The average daily wage rate is $X5 per employed person. Because of the improved sanitation, the annual medical expenses will be reduced by $ (6*X8) per person. The waste treatment plant will drastically improve the aesthetic quality of the rivers and streams in the city. A recent survey of households indicated that each household would be willing to pay $ (15*X2) per year for river water quality improvement. There are 50,000 households in the city.
The Problem
1. Develop a table of projected annual population, labor force, amount of wastewater treated for the project period of 23 years with and without the project.
2. Prepare a financial cash-flow statement of the project for the Bintuli City Government.
3. Conduct a financial benefit-cost analysis at a discount rate of X9 percent. This analysis is conducted strictly from the point of City of Bintuli. For this analysis, include only the monetary costs incurred by and benefits accrued to the City.
4. Conduct a social benefit-cost analysis of the project (from the society’s point of view) with the same discount rate. This analysis must include all the social opportunity costs and social benefits for the community.
5. Make recommendations to the City Mayor of Bintuli as to whether the project is financially and economically viable or not, with justification. Your justification should point to some of the economic principles that we discussed in this course. See below for format of your Recommendation write-up.