This paper examines whether the benefits of the Melamchi water supply
project in Nepal are likely to exceed its costs, assuming that high-quality municipal
water services can be delivered to households and firms in the urbanized part of
the Kathmandu Valley. Monte Carlo simulations are used to explore the sensitivity
of the net present value and economic internal rate of return calculations to a wide
range of assumptions and input parameters.We find that extreme assumptions are
not required to generate large differences in economic feasibility; quite plausible
differences in the values of some key parameters can lead to large differences in
the economic attractiveness of the project.
The results reveal that the three most
important influences on net present value and economic internal rate of return are: (i)
the discount rate and discounting procedure; (ii) the magnitude of monthly benefits
for households connected to the new water system; and (iii) the annual growth rate
in monthly benefits of connected households after the project comes on line. Our
contribution lies in illustrating, with an actual case study in a developing country,
the degree to which cost-benefit calculations of large infrastructure projects are
influenced by key economic modeling assumptions and input parameters.
