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OCR for page 7
Benefits and Costs
(See Appendix for calculation procedure)
BENEFITS DISCOUNTED TO THE TIME WHEN RESEARCH
IS DONE
It can be expected that both new production and savings resulting
from oceanographic research will increase with time. If the rate of increase
is proportional to the production or the savings, these will increase expon-
entially with a doubling time of T years. If the value of the annual new
production or the annual savings T years from now is B. then the aver-
age annual benefit realized over a given time, i, starting at the present
time, is approximately:
0.693 Bt r 0.693t / 0 693t V 1
AT L 3T ~T
When t is 20 years, this becomes:
B /
6.93 T (1 + T +T' J
4.62 16 \
For example, when T is 15 years, the average annual benefit over 20 years
will be 0.64B; for T = 10 years, it will be 1.12B; and for T = seven years,
2.0B. The estimated value of B for each economic benefit we have con-
sidered is given in columns 3 or 4 of Table 1. We estimate that this value
will be reached during the future year shown in column 5.
The National Oceanographic Program calls for a total federal expendi-
over a 10-year period. For simplicity in calculation we have assumed
that the funds will be evenly spread over this period, and that the annual
of research expenditures will be the same for the following 10 years.
We have also assumed that any given year of research is equal in impor-
tance to any other in producing the economic benefits attained during all
subsequent years.
To judge the value of oceanographic-research expenditures in com-
parison with other possible ways of employing the same money and human
effort, we must reduce the anticipated future economic benefits to their
"present worth," that is, their value at the time the research is carried out.
This is equal to the immediate return on an investment at compound
interest that would yield the same future return as the research. The rate
of interest is called the discount rate. Because the likely results of research
are always uncertain, this would be a fairly risky investment, and conse-
quently we have used a high discount rate 10 per cent. An investment
today of 37 cents at 10 per cent compound interest, starting immediately,
would yield the same return 10 years from now as an investment of a dollar
at that time. An investment of 22 cents today is worth a dollar 15 years
from now.
ture
rate
7
OCR for page 8
TABLE 1
Estimates of Some Future Economic Benefits from Oceanographic Research
Discounted to "Present Worth" and Compared with Costs
(I) (2) (3) (I) (5) (6)
Alien Objective Future Benefits Time Discountecl
Annual Until Value of
New These Average
Annual Pro- Future Annual
Savings d action Benefits Benefits
~will be Millions
Millions of Dollars realized of Dollars
per Year Years Per Year
1. Fisheries Increase U. S. Production
(a) Domestic 380 15 114
(it) Worldwide 17 ~a, 300
2. Marine Develop Mining Industry
(a) Manganese Nodules 125 1() 69
One producing unit
(it) Phosphorite nodules 15 10 8
(c) Placer deposits 50 1() 28
3. Ship- Lower Shipping costs to
home U. S.
Foreign (a) Reduce ship construe- on 1() 28
Trade lion costs by 10°/O through
improved design
(b) Reduce fuel consump- 250 1() 138
lion and time at sea bv
10~o through improved
routing
(c) Reduce weather losses ~10 3
by 20% through im
proved routing
(d) Reduce losses from 35 10 18
stranding and collision by
10~ through improved
navigation
(e) Shorten turn around 500 15 150
times by 20°,lo through
development of new
loading and unloading
procedures
(f) Reduce fondling and 50 10 28
boring losses by 25~,
4. Long- Improve long range 2,000 1 ~600
Range weather forecasts through
Weather improved understanding
Forecasting of air-sea interactions
5. Near- Reduce treatment-plant
Shore costs by better estimates
Sewage of receiving capacity of
Disposal coastal waters
(a) Lower construction 20 10 11
costs by 25~/o
(b) Reduce operating 60 15 18
costs by 25~
6. Near- Improve recreational 2,000 15 600
Shore opportunities and reduce
Recrea- conflicts over multiple
tion use
Totals 2.970 2.745 2.1 13
8
OCR for page 9
(7) (S)(9) (10) (11) (12)
Total
Benefits Total
Portion of DiscountedAverage Allocated Research
Value of AverageAnnual to Research Expenditures
Annual Benefits Costs of Discounted Discounted Discounted
Allocated to Oceano- Value to the to the
Oceanographic graphic Divided Present Present Benefit/
Research Research by Costs Time Time Cost
Millions Millions
of Dollars of Dollars Millions Millions
Per Cent per Year per Year (S) (9) of Dollars of Dollars
50 150 ~ 50 :4.1 1,767453 1418 ~5.8
30 21 ~
30 2 ~ 11 ~ 2.8 ~336 92 3.7
30 8
30
8 10 0.8 88 84 1.0
30 41 ~
~ 20 ~2.1 ~457 167 2.8
30 1
50 9 10 0.9
10 15 10
50 14
99 84 1.2
1.5 169 84 2.0
2.8 147 42 3.5
20 120 So 4.81,354 209 6.5
100 11 15 1.9118 )
~125 2.6
100 18 203 ~
10 60 10 6.0677 84 8.1
536 166 3.2
6,064 1,389
9
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OCR for page 11
With our assumption that the rate of oceanographic-research expendi-
ture is constant, and that the economic benefits in any year should be
discounted back to the times when the research expenditures are made, the
discounted value of the average annual economic benefits becomes:
0.693Bt / 0.093t 0.1t \
_ 1+ -
2T 3T 3 /
B /4.62 \
which for t = 20 Years = 6.93-~ 0.33 ~
T \T
That is, the discounted average annual value is about half of the
total average annual value of the benefits from oceanographic research.
RATIO BETWEEN BENEFITS DIRECTLY ATTRIBUTABLE TO
OCEANOGRAPHIC RESEARCH AND COSTS
The savings and production increases listed in Table 1 will require
other expenditures beside those for oceanographic research. As the table
shows, we estimate that the fraction of the discounted benefits directly
attributable to such research varies from 10 to 100 per cent.
These values must be weighed against the cost of the research. In
Table 2 we have shown how the planned budgets for different agencies in
the National Oceanographic Program might be allocated to various eco-
nomic benefits. These allocations are arbitrary, but they seem reasonable in
the light of present activities. The sum of the allocations to a particular
area is given in Table 1 as the annual cost of the research that will produce
the indicated annual economic benefit. The total of all these costs is 166
million dollars, whereas the average annual expenditures contemplated in
the 10-year National Oceanographic Program, plus the Navy's oceanographic
expenditures outside the program, are 280 million dollars. The difference,
114 million dollars per year, is allocated to national defense.
The fractional discounted benefits divided by the corresponding costs
are given in column 10 of Table 1. These estimated benefit/cost ratios
vary from 4.8, in the case of long-range weather forecasting, to 0.8 for
improvements in ship design. The over-all average is 3.2: that is, the direct
return on a 20-year investment in oceanography will be more than three
times larger, during those 20 years, than if the same money had been
invested at 10 per cent compound interest.
Benefits and Costs Discounted to the Present Time
In evaluating investment decisions, economists usually discount total
future returns and costs to their value at the present time, rather than to
some future time when the expenditures may actually be made, as we have
done in the preceding section. Columns (11) and (12) of Table 1 show the
present values of the total anticipated benefits during the next 20 years
11
OCR for page 12
that should be directly attributable to oceanic research, and the correspond-
ing present values of the total research costs. Benefit-cost ratios are given
in column (13~. It will be seen that these are higher than the ratios
obtained if the benefits and costs are discounted to the times when the re-
search is done. For example, the average benefit-cost ratio computed by
this method of discounting is 4.4, compared with 3.2 by the previous method.
12
Representative terms from entire chapter:
discounted discounted discounted
