4: BCA Assume the town of Coeur d'Alene is trying to determine how to deal with chemical contamination (currently at 400 parts per million) of the lake that supplies potable water for the city and is critical for the town's economy. It wants to undertake a BCA analysis for managing the contamination. 1. Define the Objective. 2. Identify potential stakeholders. 3. Identify alternatives: In this case, assume CDA has identified to reasonable alternatives. Upgrading its municipal water treatment plant to remove chemicals or managing nutrient flow in the area. 4. Identify Impacts. 5. Predict Impacts. 6. Monetize Impacts: Assume that either policy can reduce the risk from chemical contaminants, but to different levels and at different times. Municipal treatment upgrades capital costs = $20 million. The new plant is constructed over the course of one year. It starts operating at the beginning of year two. Once the plant begins operation, it has an operating cost of $5 million per year. Once constructed the plant lasts a fixed number of years, then must be replaced with a new plant. The scrap value is zero. The treatment plant reduces the contaminant to 40 parts per million as soon as it is operational. Nutrient Management plan annual operating costs (due to substitution of land use practices) of production = $4 million per year. The nutrient management plan does not directly reduce chemicals in the water, but they naturally degrade (or migrate) by 20 parts per million each year. There are potentially many benefits to reducing chemicals. Let us assume that the aggregate benefit function (Across all stakeholders) can be expressed as: Social benefits 9,000,000-200 (current concentration level) 1.75 Assume that the social discount (interest) rate is 5% and the city makes all decisions using a 30- year time horizon (starting with t=0 and going to t = 29). 7 and 8) Present Value and Discount to NPV: 1. Using an Excel spreadsheet, carefully construct a model that calculates the Net Present Value of: (a) the nutrient management plan, (b) The treatment plant if it operates indefinitely, and (c) The treatment plant if it lasts 10 years after the year it is built. (in both cases, assume the plant takes one year to build and all the construction cost is spent at the beginning of the year but it continues to operate while under construction) 9) Sensitivity Analysis