ECON 260 Chapter 6: chapter 6.pdf
26 Nov 2012
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Answers to chapter 6 analytical problems: all numbers in millions of dollars. Present values (pv) are calculated by dividing current value (cv) by (1+r)t, where t is time and r is interest rate. Pv(operating costs) = 1 million (1-1/(1+r)9)/r = 7. 1078217. Pv (net benefits) = pv (benefits) pv(costs) = 40 42. 78 = -2. 78 (mill) Pv(operating costs) = 3. 5 million [1-1/(1+r)10] (1+r)/r. Pv (net benefits) = 40-28. 38 = . 62 (mill) The pesticide ban has a higher net present value. If the municipal upgrades gives a higher pv benefits while the pesticide ban still gives a pv benefits of (mill), to be indifferent between the projects, the pv (net benefits) must be equalized between projects. The pv of net benefits for the municipal upgrades must be . 40 (mill): note, that the benefits for project 0 start in year 0, so benefits from project 0 are assumed to start in year 1.
