Resolution No. 4814 - Laserfiche WebLink

Home Browse Search

frequency of flooding affecting his house. The annualized benefits are the difference in the annualized damages and losses before and after mitigation or $6312 - $112 = $6200. is this mitigation project worth doing? Common sense says yes, because the flood risk appears high: the annualized damages before mitigation are high ($6,312). To answer this question more quantitatively, we complete our benefit-cost analysis of this project. One key factor is the cost of mitigation. A mitigation project that is worth doing at one cost may not be worth doing at a higher cost. Let's assume that the elevation costs $20,000. This $20,000 cost occurs once, up front, in the year that the elevation project is completed. The benefits, however, accrue statistically over the lifetime of the mitigation project. Following FEMA convention, we assume that a residential mitigation project has a useful lifetime of 30 years. Money (benefits) received in the future has less value than money received today because of the time value of money. To take the time value of money into account, we need to do what is known as a "present value calculations" We compare the present value of the anticipated stream of benefits over 30 years in the future to the up-front out-of-pocket cost of the mitigation project. A present value calculation depends on the lifetime of the mitigation project and on what is known as the discount rate. The discount rate may be viewed simply as the interest rate you might earn on the cost of the project if you didn't spend the money on the mitigation projecL Let's assume that this mitigation project is to be funded by FEMA, which uses a 7% discount rate to evaluate hazard mitigation projects. With a 30-year lifetime and a 7% discount rate, the "present value coefficient" which is the value today of $1.00 per year in benefits over the lifetime of the mitigation project is 12.41. That is, each $1.00 per year in benefits over 30 years is worth $12.41 now. The benefit-cost results are now as follows. Table 1.10 Benefit-Cost Results Annualized Benefits $6,200 Present Value Coefficient 12.41 Net Present Value of Future Benefits $76,942 Mitigation Project Cost $20,000 Benefit-Cost Ratio 3.85 These results indicate a beneflt-cost ratio of 3.85. Thus, in FEMA's terms the mitigation project is cost-effective and eligible for FEMA funding. Taking into account the time value of money, which is essential for a correct economic calculation, results in lower benefits than if we simply multiplied the annual benefits times the 30 year project useful lifetime. Economically, simply multiplying the annual benefits times the lifetime would ignore the time value of money and thus gives an incorrect, spurious resulL The above discussion of benefit-cost analysis of a flood hazard mitigation project is intended to illustrate the basic concepts. Very similar principles apply to mitigation Public Review Draft August 6, 2004 1-13