Course Hero CBA Report 1st draft PDF

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CBA group assignment...

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PRELIMINARY COST BENEFIT ANALYSIS TEMPLATE: GROUP REPORT This Preliminary CBA Report is to be conducted by a group comprising between 3 to 4 students. CBA Group Report worth: 25% Due Date: 5:00pm, 12th of June Mode: Written report, presented to a professional standard as per template Purpose of assessment: Provide evidence of students’ understanding of CBA in the context of a real world problem. Note: Students may add lines as required

Project Title The title of the project should be clear and concise.

Drinking age increased from 18 to 21

Signatures I have reviewed the information contained in this Group Report and agree with the contents Name

Student number

Jeffery Eludeme

s2841967

Joshua Mirupasi

s2797213

Signature

Date

Page 1

Table of contents Insert page number

Glossary

3

1

Executive Summary

4

2

Introduction and Background

5

3

Steps of a Cost Benefit Analysis 3.1. Specify the set of alternative projects

6

3.2. The perspective: Whose benefits and costs count?

6

3.3. Identify impact categories, catalogue them and select measurement indicators

7

3.4. Predict the impacts quantitatively over the life of the project

8

3.5. Monetize all impacts

9

3.6. Discount benefits and costs to obtain present values

10

3.7. Compute NPV of each alternative

11

3.8. Perform sensitivity analysis

12

4

Matters for Consideration of the proposed CBA

13

5

Limitations of the preliminary CBA proposal

14

6

List of references

15

7

Project Summary Table

16

Page 2

Glossary Insert definitions of terms used in the report that require clarification



CBA (cost benefit analysis) – It can be explained as a procedure for estimating all costs involved and possible profits to be derived from a business opportunity or proposal.



NPV (Net Present Value) - The difference between the present value of cash inflows and the present value of cash outflows.



MLDA (minimum legal drinking age) - The minimum age at which a person can legally purchase and consume alcohol.



RBA (Reserve Bank of Australia)



ABS (Australian Bureau of Statistics)



CVM (contingent valuation method) is a preference-based survey technique, which relies on a hypothetical market for eliciting valuation of all kind of non-market goods QLD (Queensland)



STD (Sexually Transmitted Disease)

Page 3

1. Executive Summary Provide a brief overview of the project

Background: This report provides an analysis and evaluation of the current epidemic of alcohol consumption of young adolescence at the age of 18. Objective: The objective of this project is to see whether increasing the drinking age from 18 to 21 is worth undertaking or not. Perspectives: The societal perspective looks at the nation as whole. Federal, state and everyone who resides in Australia. While the alternative perspective looks at the state of Queensland. Setting: The project will look at the nation and the state of QLD Method: literature research to determine the impacts and cost as well as other considerations that would be of value. Conclusion: This project should go forth considering the medical evidence as well as the way society and alcohol have aligned with each other.

Page 4

2. Introduction and Background Provide a brief overview background of the project. Define the problem: The study problem must be identified at the outset of any analysis. A clearly stated problem defines the objective of the study. At this initial stage of the study you must consider: • what questions need to be answered, and • which aspects of the problem need to be explained. Clarify the scope of the study: Target population, setting and location, time horizon, assumptions.

“One in five Australians drink at short term risky/high risk levels at least once a month” (Alcohol Working Group, 2008)These levels of alcohol consumption contribute the substantial cost to Australia’s health system, disease and injury, productivity, road accidents and property damage. Young people between the age of 15-25 are the largest demographic that cause these types of alcohol related harm. (Australian Government department of health , 2010) To reduce the costs of the alcohol related damage in Australia, policies must be implemented.

The proposed project for this CBA is increasing the legal age of alcohol consumption from the base case of 18 to 21 Australia wide. This CBA will look at the cost and benefits of this project Australia wide over a two year spread. By limiting the supply of alcohol to young people, it is anticipated that this project will improve the health of young Australians, lower accidents and alcohol related violence’s, as well as increase productivity. As has been seen in countries that have used the same strategy, such as the USA. Effectiveness of this policy in the US is evident as evaluations of US states, where the drinking age was increased to 21 in the late 1970s resulting in a reduction in crashes involving alcohol in the early 80's. Subsequently while Canadian data found a higher minimum drinking age reduced youth hospitalization rates for alcohol use disorder, alcohol poisoning, suicidal behavior and traffic crash injury. (Boddy N, 2014) . Despite, the fact that the program has appeared to be successful in other countries it must be evaluated in terms of the Australian public, to see whether increasing the MLDA to 21 in Australia is socially beneficial to society. As the proposed alternative project is to increase the drinking age to 21 compared to the status quo 18 years of age.

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3. STEPS OF A COST BENEFIT ANALYSIS

In the following subsections you are expected to explain the basic steps of the CBA in the context of your project. You are not required to show values.

3.1. Specify the set of alternative projects (Step 1) The scope of the study and the variety of outcomes to be included are determined to a large extent by the nature of the projects under consideration. Define and explain the status quo and the alternative project

Status Quo/Base Case: The base case is to maintain the current legal age of alcohol consumption at 18 years nationwide in Australia. Detailing that no minor under the age of 18, can buy alcohol, or consume alcohol, or approach a license bar for service. The current legislation also states that no adult is permitted to buy alcohol on behalf of or provide alcohol to any person under the age of 18. At this stage, current policies also include the 70% tax imposed on premixed alcoholic drinks in 2008. Although statistics point to the fact that it has been ineffective in curbing drinking habits of young people, however basic the form of alcohol they choose to drink. Every policy and current laws are congruent on a national scale for the purpose of reducing alcohol related issues.

Alternative Project: A key alternative project that must be considered is increasing the drinking age from 18 to 21. This shall not only discourage alcohol consumption by young consumers but also deter them from causing any alcohol related accidents not only towards themselves but the general public as a whole.

3.2. The perspective: Whose benefits and costs count (Step 2) Usually cost benefit analyses are conducted from a societal perspective. Thus all benefits and costs are considered. The results then indicate whether the benefits to the society as a whole outweigh the total costs of a proposed project. When using a narrower perspective, you should include only the benefits and costs relevant to that specific perspective. Explain the societal perspective. Define and explain the alternative perspective

Societal Perspective: The society's view and the scope that this report will take is accounting for the whole of Australian society including the federal and state governments and all those who reside in Australia. The societal perspective is being constrained to Australian residents only and excludes international visitors and expats.

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3.2. The perspective: Whose benefits and costs count (Step 2) Usually cost benefit analyses are conducted from a societal perspective. Thus all benefits and costs are considered. The results then indicate whether the benefits to the society as a whole outweigh the total costs of a proposed project. When using a narrower perspective, you should include only the benefits and costs relevant to that specific perspective. Explain the societal perspective. Define and explain the alternative perspective

Alternative Perspective: An alternative perspective of this project exclusively considers the view of the State of QLD including the economic costs and benefits that are associated in this project. It takes into account the initial set-up costs as well as maintenance costs. The included benefits are the states savings, policing savings, justice system, alcohol related nuisance and medical savings. Costs and Benefits excluded in this perspective include personal or social damage where no monetary value can be put on by the government.

3.3. Identify impact categories, catalogue them and select measurement indicators (Step 3) Identify all impact categories that should be included in the CBA. Catalogue these impacts as either costs or benefits. Identify the measurement indicator units used for each impact. An ‘M’ or ‘T’ or ‘P’ is used instead of values to indicate that money, time or physical units that would be employed. An ‘I’ (intangible) indicates that an entry is not measurable. Indicate the source of information that would be used to quantify each impact. IMPACTS

Units (M,T,P,I)

Source of information

Costs: Loss in Business Revenue Police Deployment

M

8

M

8

Implementing Laws

M

8

Marketing and promotional campaign

M

1

Decrease in property related crime

M

8

Decrease in alcohol crime

P

8

Reduction in road accidents and injuries

P

3

Reduction in self harm

P

2

Decreases in STDs

M

2

Less Judicial costs

M

8

Benefits:

Page 7

3.3. Identify impact categories, catalogue them and select measurement indicators (Step 3) Identify all impact categories that should be included in the CBA. Catalogue these impacts as either costs or benefits. Identify the measurement indicator units used for each impact. An ‘M’ or ‘T’ or ‘P’ is used instead of values to indicate that money, time or physical units that would be employed. An ‘I’ (intangible) indicates that an entry is not measurable. Indicate the source of information that would be used to quantify each impact. IMPACTS

Units (M,T,P,I)

Source of information

Increase in workforce productivity

M

1

Decrease in medical costs both short and long term(Cancers, Cirrhosis in the liver, Addiction, mental problems)

M

3

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3.4. Predict the impacts quantitatively over the life of the project (Step 4) Define the time frame and analytic horizon. The time frame and the analytic horizon are largely determined by the treatments or interventions under consideration.

The objective in implementing this law is to safeguard the youth from alcohol related risk. If the establishment of a higher drinking age is introduced there would be a large reduction in alcohol consumption within the 18-20 year old age bracket. Many benefits would be experienced by Australian society. This report will show that in a two-year period these benefits will be seen. It’s been observed in other countries such as America that many youths crossed state borders to drink where rules on the age limits were not as strict. However after consuming much alcohol and being intoxicated they would drive back home, which had resulted in high levels of car accidents with the 18-20 year age group. (Bier, 2013) Therefore increasing the drinking age on a national scale would result in less drink driving incidents as well as an overall reduction in car accidents within the 18-20 year old group. Also binge drinking shall decrease significantly as alcohol shall be harder to get. In addition binge drinking has a strong positive correlation with medical and public service cost therefore by minimizing the level of alcohol consumption costs shall be minimized in these sectors as well.

In particular medical costs especially short term, there will be a decrease in alcohol related crimes since this age group accounts for a large part. This means that a large amount of money shall be saved through the decrease in STDs and crime. Long term effects shall also be seen as a result of an improvement in general health, excluding the fact that the time span of two years does not adequately review these elements. (A.M Roche, 2009).All the associated costs regarding police and emergency services such as time and money shall be reduced. Subsequently there will be a reduction in alcohol related court cases thus saving time and money for trials and lawyers, thus giving way for other more important issues. (Manning, 2013).

Realistically not all would comply with the 21 legal age limit, it is most likely that the majority shall follow this law, ultimately cutting all costs associated with alcohol abuse in this age range. This is better than introducing curfews, alcohol taxes and other schemes.

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3.5. Monetize all impacts (Step 5) Indicate and explain the various data bases and sources of information that would be useful to monetize impacts. Identify important impacts that are difficult to monetize. How would you get around such issues? Do not show a dollar value but indicate how you would monetize impacts e.g. lives saved = value of statistical life* number of lives saved.

The stats from Australian Bureau of Statistics can be utilized in this report. For example the ones that can be easily monetized are alcohol related incidents such as assaults, violence or property damage, the equation below could be utilized to estimate how much money can be saved. Difficult to monetize can be thrill. Useful to monetize impacts Number alcohol related incidents x cost to attend incident = costs avoided Similar CBA reports could also be utilized to monetize the impacts of raising the minimum drinking age. Australian Institute of Health and Welfare data can be used to estimate the value of numbers of lives saved from increasing the legal drinking age. Surviving victims x per incident costs = lives saved Court time used x number of incidents = total court time used Government reports are also useful when estimating health care costs such as ambulance and hospitalization costs and statistics. Alcohol related admissions x average cost per admission = total alcohol related health care costs

Difficult to monetize People tend to drink for the thrill and the exhilarating feeling that alcohol generates at that moment of consumption. Monetizing this state of emotion would be quite difficult to because of the state of mind people are in and they lose control of themselves. Therefore though it might not provide the same outcome as intended, we might consider measuring something similar that is associated with thrill and giving that exhilarating feeling, like thrill rides at theme parks. For example: Cost of purchasing alcohol x extent of thrill = unknown Cost of purchasing tickets x extent of thrill = total time used

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3.6. Discount benefits and costs to obtain present values (Step 6) Define the discount rate: Discounting makes it possible to compare benefits and costs that occur at different times by adjusting their values according to the time preference corresponding to the chosen perspective. The discount rate is one parameter that can be varied in a sensitivity analysis to test its impact on the results of analysis and to make the results of studies based on different discount rates comparable. Include the relevant formulas appropriate for the project. What are the ongoing costs to be discounted?

Figures that can be used to find the discount rate The discount rate reflects the opportunity cost of the project relative to other investments. As such, we have considered the RBA’s most recent target cash rate of x%, (Reserve Bank of Australia, 2014) 2-15 year Australian Government Bond yields, (Bloomberg, 2014) 1-year Corporate Bond yields and the most recent Consumer Price Index (CPI) of x%.

Discount rate After considering the above figures, we have found x% to be the most appropriate discount rate.

This is the formula that can be used in implementing the discount rate**: Discount Formula: PV = X/(1+I)^N where PV = present value, X = capital, I = interest and N = time. As such: PV = X/(1+i%)^N Discount rates that can be used in the sensitivity analysis Based on the data above, numerous possibilities of discount rates have also being considered. The RBA cash rate has varied from a high of x% in March 2008, to the lowest point of x%, which it currently sits at today. (Reserve Bank of Australia , 2014) For the purposes of the sensitivity analysis, this should be the range used between the high x%- x% low, as Australian Government and Corporate Bond rates are linked to this figure and the cash rate has shown to be more volatile over the past 6 years then CPI, prompting more concern. (Rate Inflation , 2014)

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3.7. Compute NPV of each alternative (Step 7) Include the relevant formulas appropriate for the project

Computing the NPV of alternatives In order to compute the NPV for each alternative, we need the total monetized impacts of: PV Benefit cash flows – PV Cost cash flows, over the 2-year period that this project proposes. Formulas The formula used would be the same for implementing the discount rate, except it would total the present value benefits and then the cost cash flows over the 2-year period, before subtracting them to obtain the NPV. Let PV b = Present value of benefits; and PV c = Present value of costs. Therefore: PVb = B/(1+i%)^1 + B/(1+i%)^2, where B = total benefits for year 1, or 2. PVc = C/(1+i%)^1 + C/(1+i%)^2, where C = total costs for year 1, or 2. NPV = PV b - PVc

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3.8. Perform sensitivity analysis (Step 8) Explain method used in sensitivity analysis. Why was this method chosen? Identify the variables chosen for Sensitivity Analysis. Why were these variables chosen?

Sensitivity analysis also known as ‘what-if analysis’ is a technique used to asses or determine how a project performance and is affected by the changes of the assumptions that the project is based on (Armin Laidre 2014). “There may be considerable uncertainty about predicted impacts and their appropriate monetary valuation. But that is a reason for conducting sensitivity analysis with the disputed variables and improving the estimates.” (Harrison, 2010, p.3) The method of sensitivity analysis that shall be used for this case, is partial sensitivity analysis, although it may not yield as ...