CostBenefit Analysis of an Oil Fuelled Power Station

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Sensitivity analysis also examined project responses to varying discount rates.2. Once constructed, the station will begin immediate delivery of electricity and will continue to do so (at a constant rate) over a period of 45 years from its first operation. Its operational life is 45 years.A Cost-Benefit Analysis (CBA) of the above project has to be done given the assumptions and cost/revenue details. An appropriate discount rate is essential for conducting a CBA. In the following paragraphs, we would detail the reasons for choosing a particular discount rate. Thereafter sensitivity analysis would be conducted varying critical parameters of the CBA to conclude if such variations do affect accept/reject decisions materially. It would be followed by an appraisal report covering the CBA and the sensitivity analysis.The discount rate is the rate by which benefits/costs accruing in the future project running periods may be adjusted so that a comparison with present values is made possible. Conceptually this rate should be the rate which is the equilibrium rate in demand and supply of savings in the present time. In order to save investors compare the value of current consumption to its future value and seek a rate of compensation required to curtail present consumption. An appropriate discount rate choice becomes important as funds are required for a large-sized public project which seeks to increase the social welfare of society at large. The funds are derived from the public and their benefits would accrue to the public. In case a decision other than the correct decision is arrived at due to inappropriate choice of discount rate either the society would not have the benefits of the project or they would have the project but suffer more in terms of costs than benefits.