Economic, Environmental and Social Factors That Affect the Discount Rate - Assignment Example

Q1 Net Present Value of the Project The 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 Society May-08 Discounted Cash Flow in $ Year Capital Cost Benefit Net Flow Cum.Flow NPV@12% NPV@9% NPV@6% 0 1500000 -1500000 -1500000 -1500000 -1500000 -1500000 1 80000 200000 120000 -1380000 107143 110092 113208 2 100000 300000 200000 -1180000 178571 183486 188679 3 100000 350000 250000 -930000 223214 229358 235849 4 90000 450000 360000 -570000 321429 330275 339623 5 70000 500000 430000 -140000 383929 394495 405660 6 90000 450000 360000 220000 321429 330275 339623 7 90000 350000 260000 480000 232143 238532 245283 8 100000 300000 200000 680000 178571 183486 188679 9 150000 250000 100000 780000 89286 91743 94340 10 200000 200000 0 780000 0 0 0 Cumulative 535714 591743 650943 Q1 Whether I Would Accept This Project and Why I 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 It The 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 It The 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 Value The 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 Rate The 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 Rates The 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 Development I 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. The first step would be for me to internalize the equality of the views and backgrounds of people and groups with who I must deal. It is not as though my engineering skills put me in any vaulted position with respect to them. There are many professionals from diverse fields in this community who may be more knowledgeable than I. It is not a matter of knowledge alone, for the community includes recent migrants from other parts of the world. Their languages and customs will affect how they view the proposed project: I cannot start out with the assumption that I am invariably right. This also implies that my employers and sponsors have to accept that my ultimate recommendation could be to shift the project at a nominally higher cost to another location. Meta-literacy must start with the possibility that the engineering solution is flawed in human or social terms. The next step would be for me to find appropriate means of communication and dialog. Which day of the week and time of day suits the community best? I love my leisure time, but can hardly expect local residents to take days off to speak with me. I may have to reschedule my weekly breaks so that I am available for community meetings at times convenient to the community I want to serve. Language is a related issue. Perhaps some of the important influencers are not entirely comfortable with English, or even with my accent. I cannot be expected to learn a new tongue, but I will leave no stone unturned to ensuring that all residents are able to communicate free of any embarrassment or discomfiture. The mode of dialog is another delicate issue. I would love a web log, but perhaps not all community members are computer and Internet literate. Group meetings may descend in to chaos. I would therefore have to find a local community leader who could chair and conduct meetings in which I could participate equally with residents. These discussions should be recorded in some form for future reference, and for my benefit as well. The third step would be to understand community concerns with empathy, and free of interruptions based on my assumptions. Residents would not object to my project out of blind bias: pollution, inconvenience, and hazards are genuine concerns, even if I think I have solutions for them in my pockets. The community and I should agree on a list of issues which need to be addressed before the project can make progress. I would like to de-freeze everyone from the immediacy of the project at this stage. I would like to use the case study method which has been used for my own training. I would like to present the case of the Paradise Dam, right from the early stages of opposition to its very conception, to its blessed re-christening by a grateful community. We could also have other cases in which environmental and social concerns have over-ruled project site selection by engineers. The aim is to agree with the community on a decision-making process by which a joint and consultative decision on this project could be taken. Now I would present the specific measures of my project with respect to noise reduction, pollution abatement, and related measure. I would highlight transparent control systems by which the community could reliably verify if the project causes them any harm. We should also be aware of the legal safeguards available to all stakeholders, and how any aggrieved party could seek effective and timely redress, should the project not meet its environmental conservation and social integrity specifications. I would also like to point out, in a neutral way, what the community would lose if the project is shifted to another location. I would accept any decision arrived at jointly and in a civil way, after the meta-literacy process of trans-cultural engagement is complete. I am convinced that the project brings net benefits to the community, and that the chances of having to shift it should be small. Q 3 Common Law Perspectives of Environment Management Disputes I should start with a caveat: the morality of the objections that have been raised by the local group of activists, matters at least as much as the Supreme Court judgment. It would not be professionally appropriate for engineers to seek shelters in law without satisfying themselves that the merits of objections related to conserving forests have been adequately addressed in project design. Therefore, an extra-judicial settlement with the activists, based on objective consideration of their concerns and our project safeguards, is the way to go. However, it may be that such a resolution cannot be achieved, or that my organizational superiors do not agree with such an approach. There are two aspects of Common Law on which I would communicate with the appointed attorneys. One is how our impact on the forests is so marginal and different from the one in which the Supreme Court has pronounced judgment that the Environmental Management Court would not be bound by precedent. Litigation expenses would be wasted in case a precedent by the superior court applies in this case: the Environmental Management Court would have no choice but to decide against us in such an event. The other aspect is there is any statute, which can be cited against the Supreme Court judgment. Final legislative action can supersede Common Law. Only professional lawyers could establish the merits of such an approach in this case. I would assume that the Supreme Court would have examined all applicable statutes before pronouncing judgment. Hence, the chances of this approach succeeding are low. The legal case would be strengthened most by compelling technical arguments about forest conservation in this particular project design. We have to clearly establish that the original rural community and their inherited bio-diversity wealth stand protected. It would be best to present the Environmental Management Court with concrete actions and safeguards that would protect the environment and the local community from any significant deleterious effects of the project. References Thorpe, D, 2002, Technology and Society, web site of the University of Southern Queensland, retrieved May 2008 from: http://ocw.usq.edu.au/course/view.php?id=14%3Cbr%20/%3E Read More