Assignment 3/4 - Introduction to public economics (ECON-S-301)

Academic year 2016-2017

Prof for this topic: Ilan Tojerow
TA for this assignment: Guillaume Perilleux (gperille@ulb.ac.be)
Topic: Cost Benefit Analysis
Deadline: Friday, November 25th at 18h.
Before sending it, make sure to respect the following instructions. If you do not, your
assignment will not be evaluated.
Each assignment account for 2.5% of your final grade.
Fill in the blanks in the file and do not attach further papers (you can use the verso
of each questions page, if you need more space).
The assignment is individual and must be hand-written.
The assignment must be a single PDF file.
The file must be named as: Name-SURNAME.
Upload it on the UV.
No assignments sent by email will be evaluated.

Exercise 1
Concerning the case study Bridge over the Tempisque river, answer the following questions:
1. Who is in favor of the bridge construction? Who is against? For what reason(s)?

2. Why did the MOPT decide the construction of the bridge was not needed in 1979?
Why did that decision change in 1991?

3. In 1991 the MOPT performed a CBA and found an Internal Rate of Return for the
bridge project of 12.38 %. It then decided that the project was worth implementing.
Why? (i.e. What was the decision rule here?)

4. The MOPT had chosen a discount rate of 12% for its evaluation. If a 13% discount
was used in the CBA, would it have yielded a result in favor of the construction of
the bridge? Why?

Exercise 2
In the tables below, list all the costs and benefits categories the Ministry (MOPT) considers in its CBA of the construction of a bridge described in the case study Bridge over
the Tempisque River.
The Ministry has cash flow data for some of them, while some other costs/benefits need
to be valuated to be given a monetary value.
For the categories which need to be monetized (i.e. that do not come in a cash flow):
1. indicate the valuation method applied by the Ministry ,
2. explain the practical procedure one must follow to apply it and point out the data
needed to put it in practice in this context,
3. indicate an alternative valuation method you could have picked if you were the
expert performing the CBA, point out the data you would need and the procedure
you would follow to apply it.

Exercise 3
In Exercise 2 you have commented upon all the costs and benefits considered by the
Ministry. Now add to the appropriate table the following categories (are they costs or
benefits?) and develop point 2.3 for each of them.
direct environmental impacts (in the short term),
improved travel conditions.
Note: Draw a line in the tables between the results to Exercise 1 and the ones to this
Exercise

Exercise 4
Using the spreadsheet with data available on the UV, replicate the Ministrys CBA and
compute the net present value and the cost-benefit ratio of this project (i.e. fill in the
empty columns/boxes with a coloured background in the spreadsheet). Attach to the pdf
of the assignment the spreadsheet with calculations.1 2
Note that the Analysis of the MOPT is performed in 1991 (t=0). Furthermore, your
results should be very similar to those presented in Exhibit 2 of the case study.
1

Note that this is the only question to which we will accept a type-written answer. All the rest must
be hand-written.
2
the formulas should be present in the cells, DO NOT simply copy the numbers from the study case
or from other students!

COSTS

Valuation method used by

MOPT

Procedure and data

Alternative
method

valuation Procedure and data

BENEFITS

Valuation method used by

MOPT

Procedure and data

Alternative
method

valuation Procedure and data

Exercise 5
Assume two projects A and B. In project A, the government needs to do an initial
investment of e4.95 million and will receive e1 million every year during the next 7
years. Concerning project B, a first investment of e2 million should be initially made
and will provide benefits of e735,000 for each of the next 7 years. During the 4th period,
an additional investment of e2 million will be needed (Hint: the investment period is
t=0).
1. If we consider a discount rate of 7%, which project will be undertaken by the
government? Explain all your computations.

2. Suppose that both projects can only be financed by raising the tax burden and
consider an efficiency cost of e0.06 for each e10 of tax. Note that the efficiency
cost occurs only when the investments are made. How does it affect your CBA
computation? Does your conclusion in point 5.1 remain the same?