Q1 Net Present Value of the ProjectThe Net Present Value at 12% is $535714 at the end of 10 years, taking the year of capital outflow as year zero. The spreadsheet used is copied below: Technology and SocietyMay-08Discounted Cash Flowin $YearCapitalCostBenefitNet FlowCum. FlowNPV@12%NPV@9%NPV@6%01500000-1500000-1500000-1500000-1500000-1500000180000200000120000-13800001071431100921132082100000300000200000-11800001785711834861886793100000350000250000-930000223214229358235849490000450000360000-570000321429330275339623570000500000430000-14000038392939449540566069000045000036000022000032142933027533962379000035000026000048000023214323853224528381000003000002000006800001785711834861886799150000250000100000780000892869174394340102000002000000780000000Cumulative535714591743650943Q1 Whether I Would Accept This Project and WhyI cannot take any position on this project without knowing its qualitative aims and societal benefits. I would question cost escalations in years 2, 6, 9, and 10. Similarly, the decline in benefits from year 6 onwards requires review. The average engineering project should keep cost escalation within inflation rates, and remain productive well beyond five years. Q 1 Net Present Value of the Project @ 9% and Whether I Would Accept ItThe Net Present Value at 9% would be $591743.
My perspective of the project would not change in this scenario compared to the base case of 12% interest. Q 1 Net Present Value of the Project @ 6% and Whether I Would Accept ItThe Net Present Value at 6% would be $650943. My perspective of the project would not change in this scenario compared to the base case of 12% interest. Q1 Effect of Discount Rate on Present ValueThe discount rate is a matter of macro-economics rather than engineering.
It is important to discounting future cash flows because interest costs are realities. I do not know if costs and benefits have made assumptions about inflation rates, or whether they have been projected at constant rates. The differences in Net Present Values at 12%, 9%, and 6% are not material considering the capital cost. It is most likely that the qualitative objectives of the project outweigh the numbers.
Q 1 Economic, Environmental and Social Factors That Affect the Discount RateThe main economic perspective of the discount rate is to reflect the cost of funds. This may be the interest rate for long-term projects. Such a rate could be subsidized in some countries. Another economic dimension would be to use opportunity costs as the discount rate. That is why I would prefer to use the Internal Rate of Return (IRR) in addition to the NPV, to compare this project with others that may compete for funds. Environmental accounting should influence the estimations of costs and benefits, rather than the discount rate per se.
This applies to social factors as well. The bank rate is set by human beings, and is influenced by a host of pressures. Islamic societies and financial institutions would prefer to share the benefits and risks rather than apply an interest rate. However, it helps to maintain objectivity if an appropriate and mutually agreed discount rate is applied as one of the measures of project appraisal. Q 1 Significance of Sensitivity of Discount RatesThe main utility of discounting future cash flows should be to negotiate the cost of funding.
It is also a sound measure of risk management, since central banks do change interest rates frequently. It would be prudent to price the benefits conservatively. This implies ensuring an early Pay-back of capital cost if inflation is expected to be relatively high. Q 2 Strategies for Engaging Local Residents in Project DevelopmentI would adopt a meta-literacy approach to the assignment of engaging various stakeholders in a residential locality about the environmental impact assessment of building industrial infrastructure in the area.