Answer to Question #119487 in Macroeconomics for Konlan Roland

Question

To ensure food security in the Savannah Region of Ghana, the Chief Executive of Northern
Development Authority (NDA) has proposed a ten (10) year investment in irrigation for the
agricultural sector. This project is to be implemented in all the districts of the Region. The
flow of annual gross benefits and costs of this proposed project are given in the Table below.
Table 1 Discounted resource flow for the project of in millions of Ghana cedis
Year Total costs (GHS) Total Benefits (GHS)
0 1000 0
1 100 0
2 45 90
3 98 120
4 64 132
5 64 148
6 95 103
7 80 100
8 122 155
9 99 161
10 86 902
Using a discount rate of 10% and conversion factors of 1.2 and 1.1 for every cost item and
every benefit item respectively, calculate the following indices of the project and comment on
your results:
(a) The Economic Benefit/Cost Ratio
(b) The Economic Net Present Value

Answer 1

The economic costs/benefits is obtained by multiplying the total costs/benefits by the conversion factors of 1.2 and 1.1 respectively. The present value (PV) is obtained by multiplying the economic costs/benefits by the present value factor.

Economic Benefit/Cost Ratio 

Benefit-cost ratio (BCR) = PV_benefits/ = PV_costs

BCR =  1,038.84 / 1,814.30

BCR =  0.5726

Conclusion

Since the BCR is less than 1, it is not economically feasible. 

The Economic Net Present Value

NPV = 1,038.84 - 1,814.30

NPV = (775.46)

Conclusion

The NPV is negative implying that the project is not viable since it does not generate positive inflows.