In 2003, a private consultancy produced a Cost-Benefit Analysis (CBA) of proposed new health warning on tobacco products (see file). The evaluation of the proposed health warnings had a central case results (see Section 7 and Table 7.1) and two sensitivity tests (see Section 7 and Tables 7.2 and 7.3 respectively). In this question, we are going to analyze the setting described by Sensitivity test one (Table 7.2). The excel spreadsheet corresponding to Sensitivity test one is also attached here. You should be able to download it and then work on it using excel Some of the questions below require the use of the excel spreadsheet (or equivalent software).

1. With a discount rate of 7% the Net Present Value (NPV) is estimated to be $454 million. Determine the NPV if a discount rate of 10% was used instead. Round your figure at the nearest integer. {Hint: before answering this question you should double check that your excel formula correctly replicates the NPV at a discount rate of 7%} NPV=

2. With a discount rate of 7% the Benefits-Costs Ration (BCR) is estimated to be 1.3. Determine the BCR if a discount rate of 10% was used instead. Please enter the value rounded to the second decimal digit included. {Hint: before answering this question you should double check that your excel formula correctly replicates the BCR at a discount rate of 7%} BCR=

3. How large could we set the discount rate before the project is no longer worthwhile? Assume that when the NPV=0 or the BCR=1 the project is still worthwhile. {Please enter the value in number form rounded to the second decimal digit. For instance, for 4.23% enter 0.04} discount rate=

4. Which of the following cases would reduce the NPV of the health warnings? {Enter the letter associated with your chosen option} a) a larger discount rate b) smaller gains to non-tobacco firms c) greater loss of excise/customs revenue d) all of the above

This 2003 CBA analysed the effect of increasing the size of the health warnings from 25 percent of the front and 33 percent of the back of cigarette packs to 50 percent of the front and back of cigarette packs. Suppose the government was contemplating an alternative strategy: plain cigarette packaging. Under plain packaging there would be the removal of all branding (colours, imagery, corporate logos, and trademarks), permitting manufacturers to print only the brand name in a mandated size, in addition to the health warnings. While the 2003 CBA did not cover the case of plain cigarette packaging, suppose another CBA had done so and estimated both the benefits and costs to be 1.5 times larger than those reported in Table 7.2 of the 2003 CBA. Answer the following:

5. Under plain packaging, the NPV would be the same as in Table 7.2 of the 2003 CBA. Y/N

6. Under plain packaging, the BCR would be the same as in Table 7.2 of the 2003 CBA. Y/N

7. Under plain packaging, the IRR would be the same as in Table 7.2 of the 2003 CBA. Y/N

8. Based on efficiency alone, plain packaging is the best project. Y/N