Question

A proposed policy change is expected to result in a one-time $4 million savings, occurring in 10 years from today. Supposing that the discount rate is 13%, calculate the present value of this benefit (cost- savings). Report your answer in millions of dollars rounded to 2 decimal places. E.g. If you think the answer is $1.978 million, enter 1.98 Answer: Save response A proposed policy change is expected to reduce traffic congestion by 10% every year, beginning next year and lasting indefinitely. Analysts have assigned a $1 million monetary value to this benefit. Supposing that the discount rate is 5%, calculate the present value of the reduced traffic congestion. Report your answer in millions of dollars rounded to 2 decimal places. E.g. If you think the answer is $1.978 million, enter 1.98 Answer:

Answer 1

Answer 1

$1.18 million

Answer 2

$20 million

Explanation:

Answer (i)

Given :

FV - Future value, $4 million

r- Discount rate, 13%

n- Time when the savings will be received, 10

This is a one - time receipt and therefore, its present value is given by;

PV = FV (1 + r) ^{- n}

Where

FV - Future value,

r- Discount rate

n- Time when the savings will be received,

PV = 4 (1.13) ^{- 10}

     = 4 * 0.2945

      = $1.18 million

Answer 2

Because the savings are received indefinitely, then the present value would be given by;

PV = A/ r

Where;

A-Annual benefits, $1 million

r- Discount rate, 5%

PV = 1/ 0.05

     = $20 million