Question

13. The benefits and costs in millions of dollars of two restoration projects are as follows: Benefits Year 0 50 30 100 Year 1 50 30 50 Year 2 50 30 Costs Benefits Year 3 50 30 125 15 25 Costs 50 40 15 a. Using a discount rate of 5% compute the net present value of each of the two alternatives. Explain your results.

Answer 1

As per the information given

Year		Year 0	Year 1	Year 2	Year 3
A	Benefits	50	50	50	50
	Costs	30	30	30	30
Net Cash Flow of A		20	20	20	20
B	Benefits	100	50	25	25
	Costs	50	40	15	15
Net Cash Flow of B		50	10	10	10

Net Cash Flow = Annual Benefits – Annual Costs

a. Calculating the Net Present Value of two alternatives at interest rate of 5%.

NPV of A

NPV = 20 + 20 (P/A, 5%, 3)

NPV = 20 + 20 (2.72325) = 76.45

NPV of B

NPV = 50 + 10 (P/A, 5%, 3)

NPV = 50 + 10 (2.72325) = 77.23

On the basis of the above calculation, we can say that the alternative B is more profitable than the alternative B. The alternative B has more NPV than the alternative A.

Note - all the costs and benefits are in million of dollars