(a) If you ignore the direct health benefits shown in column 4, what is the net

Question

(a) If you ignore the direct health benefits shown in column 4, what is the net present value (NPV) of the project? Use a discount rate of 15 percent.

(b) What is the NPV using a discount rate of 10 percent?

(c) To the nearest percentage point, what is the internal rate of return on the project? Recall that the internal rate of return is the discount rate for which NPV = 0.

(Hint: If you cannot solve the math, use the results from (a) and (b) to give you a range.)

(d) Using column 6 as the measure of benefits, what is the NPV for the project using 15 percent as the discount rate? What is the NPV using 10 percent as the discount rate?

(e) Obviously, the return on this investment depends heavily on whether one includes an estimate of the direct health benefits and on how the estimate is made. But what about measurement of the production benefits? Is it likely that the figures shown in columns 2 and 3 of Table 9-5 are reasonably accurate? Explain.

Table9-5 Costs and Benefits of Health Project in Hinterland (francs) Benefits Productivity gains Output from increased labor force Value of health Production benefits Total economic benefits Cost Year 1997 1998 1999 1,000,000 0 0 0 200,000 200,000 0 600,000 600,000 100,000 500,000 800,000 100,000 500,000 800,000

Explanation / Answer

(a) NPV = - 1,000,000 + 600,000 / (1+15%) + 600,000 / (1+15%)2

= - 24,574.67

(b) NPV = - 1,000,000 + 600,000 / (1+10%) + 600,000 / (1+10%)2

= - 41,322.31

(c) 0 = - 1,000,000 + 600,000 / (1+IRR) + 600,000 / (1+IRR)2

=> IRR = 13.07%

(d) NPV = - 1,000,000 + 800,000 / (1+15%) + 800,000 / (1+15%)2

= 300,567.11

NPV = - 1,000,000 + 800,000 / (1+10%) + 800,000 / (1+10%)2

= 388,429.75

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