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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
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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
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(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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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
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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