Newsgroups: soc.culture.asean
Subject: Re: MRT in K.L
From: chuah@elec.canterbury.ac.nz (DanC)
Date: 17 Apr 92 03:00:07 +1200
Organization: Electronic and Electrical Engineering Department, University of Canterbury, New Zealand.

Important note:  If you are not one who gets into economics, press the
kill button now.


In article <92106.195917ASCKN@ASUACAD.BITNET> ASCKN@ASUACAD.BITNET (C. K. Ng) writes:

>  A project like MRT is a long-term capital investment.  The initial
                           ^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>outlay may be astronomical in magniture, but the (expected) return
>can be long into the future.  By expected return, I am referring only
                               ^^^^^^^^^^^^^^^^^^
>to the monetary return.  In project evaluation like this, the
>universally acceptance criterion is simply applying the net present
>value (NPV) rule taught in all Principle of Finance classes at
>the undergraduate level.  In a netshell, it says that as long as the
>present value of the expected net future cash inflow exceeds the initial
>outlay, then a positive NPV would result, and the project should
>be accepted under non-binding capital rationing.  Of course, if
>it's an exclusive project in which ONLY ONE has to be chosen from
>a few alternatives, then the one with the highest NPV should be
>chosen.  

I am not an economic export, neither am I an economic professor, 
however, I must question the above comments.  How can one evaluate
what a long term public project will return in future.  There are 
so many hidden factors.  Take for example, a dam.  It provides people 
with water to drink.  However, the water meter charges can never 
recover the cost of building the dam in the first place.  
However, people can justify building the dam by the fact that drinking 
water is a necessasity of life.  How can the contrinution of the 
dam be calculated in terms of net present value.  Furthermore, the 
calculation of net present value depends a lot on interest rate and 
inflation projections.  How accurate are these projections anyway?

Bringing the arguement back into the current discussion, how can we
quantify the expected return of say the savings in reducing polution 
caused by the installment of the MRT system?  How can we quantify
the time saved by an efficient transport system?  Or let me put
my case this way.  How can we quantify the expected return of 
the alternatives seeing that there are so many hidden factors
involved?  

>So, the improvement over the environment should be
>considered as an addition to the expected return equation.

The question is by how much?

>   Next comes the survivability question.  There's a rather
>simple solution to this.  Tax!  

Tax also has to be taken into account as part of the cost, no?

>   Evaluating the project based NPV rule is more meant for commer-
>cially oriented projects where the investors are assumed to be
>profit maximizers.  However, for a public project like this, the
>NPV rule can only be applied to a certain extent.  

Agreed.  Sometimes mere profit and loss alone cannot be used to 
justify a public project.

ps.  My appology if I have bored anybody to death with this economic
     mumbo jumbo.

----------------------------------------------------------------------
Dennis Chuah, BE (Elec)    | "One Country,  | Supporting the Malaysian 
Te Whare Wananga O Waitaha | One People." - | Hockey team for gold in 
Aotearoa.                  | Maori proverb. | Barcelona.
----------------------------------------------------------------------
"Pencangkul Matahari" email: chuah@stargate.elec.canterbury.ac.nz


Newsgroups: soc.culture.asean