r - part - usaid

assumed to be twelve years. With proper maintenance, however,
most wells are expected to remain in use for fifteen to twenty
years. The casts shown are at constant 1986 prices, and do not
allow fur i~flation. Therefass, projecting a lcngar life for
the wells would simply require extending the stream cf costs
over more colmns+
Because of the implied comitment to operation and
maintenance costs when the decision to construct a well '; is
taken, it is necessary to include these in the estimate af tatal
investment costs. For this, the future costs of operation and
maintenance are discaornted to give the Net Present Value (N2V).
The principle af discounting is based an the concept that
financial investment now, in goods and services delivered in the
future, is worth less than financial investment now, in goods
and services delivered imediztely. In the case of well
construction, this is readily obvious from society's paint of
view. An alternative way to consider this, and a more practical
way to arrive at the appropriate discounting rate to be used, is
to consider the investment in purely financial terms, In this
case, the investment required now, to cover costs incurred one
year from now, m y be thought of as the amount which, if
deposited at the bank, would accrue to the amount requ!.red In
one year. Excluding the social considerations, the drscaunt
rate is the interest rate an investments.
Annual interes-k rates o.'fered by financial institutions in
3omalia at the t ime of writin? vary from 32%, for short-tern, to
17% for long-term investments. Corresponding interest rates in
the U~ni"ted States range from ;% to approximately 113%. Because
the local currency cost of ogeratlon and maintenance, which
consists only of the labour cost, constitutes less than 10% of
the total, it can be argued that the correct discount rate to be
United
used should be clbser t3 the bank interest rates of t ~ ~ e
States than to those oZ Somalia. The rate assumed in this
report is 10%.
in these calculations, construction costs are assumed to be
incurred in year 0. The first year of operation and maintenance
costs are incurred in yea:? 1. NPVis are therefore calculated
for year 0, and all costs incurred from years I through 12 are
discounted. Discounting b~ysnd the twelve years shown in the
analysis makes ssch little difference to the NPV as to be
negligible*
The actual discount rate used in the calculation makes a
siyrrificant difference to the NPV* Using the Bay Region costs as
shown in Table 2.4.11 as a base, the NPV in year 0 varies
considerably, as shown below: