Question

1. The benefit of an environmental policy is $1,750,000, but is realized only 60 years in the future. The cost of implementing that policy today is $50.132. Using a discount rate of 6.1% and expressing your calculation as a whole number, a benefit-cost analysis would: A) B) C) D) recommend the policy be adopted. not recommend the policy be adopted. be indifferent to the policy being adopted. recommend a different policy be adopted. The present value of a stream of net benefits of $40,000 per year received at the end of each year for 5 years discounted at 4% equals: 2. A) $178,073. B) $188,073 C) $198,073. D) $208,073.

Answer 1

1. Benefit of the environmental policy realized in 60 years = $1,750,000

Cost of implementation = $50,132

Discount rate = 6.1%

What is the benefit-cost ratio?

B-C Ratio = PW of benefits/PW of cost

B-C Ratio = $1,750,000 (1 + 0.061) ^-60/ $50,132

B-C Ratio = $50,132/ $50,132

B-C Ratio = 1

Answer – C) be indifferent to the policy being adopted. (B-C Ratio = 1)

2. Present value of annual benefits of $40,000 for 5 years at discounted rate of 4%

PW = $40,000 (1+0.04) ^-1 + $40,000 (1+0.04) ^{-2 +} $40,000 (1+0.04) ^-3 + $40,000 (1+0.04) ^-4 + $40,000 (1+0.04) ^-5

PW = $178072.89 or $178,073

Answer – A) $178,073