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