Economy / environment
Economic and Environmental Considerations
Case Study - Johnstone River Flooding
Benefits of the Construction of Flood Modification Measures
worth of Annual
Present Worth Factor
for Calculating Benefit-cost Ratios
In general, the benefits of the construction of flood modification measures are as follows:
increased flood immunity of properties protected by the measure leading to ;
increased flood immunity of roads protected by the measure and thus improved mobility of the community during flooding;
decreased cost of flood damage to properties protected by the measure;
decreased potential for loss of life during a flood event within the area protected by the measure;
decreased emotional, social and psychological trauma experienced by residents in times of
The overall financial
viability of an
option is initially assessed by calculating the monetary benefitcost
A financial project life of
was chosen for this study. This does not imply that the projected
life of the scheme is only 50 years. In fact, some measures should be
in reducing the frequency of flooding for centuries to come.
It is not correct to simply multiply a long term average annual benefit by the financial project life of 50 years to derive a total worth of the benefits. To do so would ignore the important point that the benefits from this scheme (ie. reduced flood damages) will occur over time and in the future.
For example, a benefit of $2.3 million to be gained in 10 years time is not worth $2.3 million now but only $1.2 million now. This is because $1.2 million could be invested now and appreciate at say 7 % p.a. over and above inflation for 10 years. This would then be equivalent to $2.3 million in 10 years time.
This is called the Present Worth of the benefit. It is a universally accepted economic theory and used in all major project economic analyses. The adopted rate of 7 % is called the discount rate and is the middle of the range 6 to 8 % recommended by the Queensland Government for assessing public works.
If the present worth benefits
for each year are totalled for the
50 years, the total present worth (or total benefit) of the benefits is
$ 31.7 million. The calculation of the total benefit can be simplified
through the use of a Present Worth Factor.
Rather than calculating the present worth for each year
and summing to calculate the total benefit, a Present Worth Factor can be used when the annual average benefit is identical in each year.
The Present Worth Factor is calculated using equation (1).
The Present Worth Factor is
annual average benefit to calculate the total benefit.
The Present Worth Factor is 13.8 for a 50 year period and a discount rate of 7%.
It is interesting to note that if a longer financial project life of say, 100 years was chosen then the total present worth of the benefits is only $1.1 million more at $32.8 million. This is due to the fact that the present worth of the benefits to be accrued in the second 50 year period is low because of the length of time until the benefits are realised.
The procedure for calculating benefit-cost ratios is outlined below:
1. Calculate the average
annual benefit associated with the option
(i.e. the reduction in annual
average damages) using the method described in Section 6.3,
2. Convert the average annual benefit to a total benefit by multiplying by the present worth
3. Calculate the total cost of the option.
4. Calculate the monetary benefit-cost ratio:
Benefit + Cost Ratio = Total benefit/total
Benefit + Cost Ratio = Total benefit/total cost
Impacts on flood response and
Impacts on riverbank stability;
Public utility impacts for example, sewer routes may need to be revised.
Visual impacts and blockage of views Levees can have a detrimental impact on the visual aesthetics of an area. They can do this by blocking views or by visually spoiling a formerly attractive area.
Heritage and archaeology impacts;
Impacts to traffic routes; and
Impacts to fauna passage and flora.