Present worth of Annual Benefits

The Present Worth Factor

The Procedure for Calculating Benefit-cost Ratios

Environmental Considerations

- 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 flooding.

The overall financial viability of an option is initially assessed by calculating the monetary benefit / cost ratio (BCR).

A financial project life of 50 years was chosen for this study. This does not imply that the projected structural life of the scheme is only 50 years. In fact, some measures should be effective 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 multiplied by the 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

factor*;

3. Calculate the total cost of the option.

4. Calculate the monetary benefit-cost ratio:

Impacts on flood response and evacuations

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.