Question

In: Economics

A project being consider by a local government has the following estimated benefit – cost data...

A project being consider by a local government has the following estimated benefit – cost data
$1000 investment for the first 2 years and then recurring cost of $5000 for the coming 2 years and
$8000 for year 5& 6 respectively. Also there are benefits of $20,000, $30,000, $ 30,000 and
$20,000 starting from the third year. Consider the interest rate to be 10%, design an optimal
solution to perform cost-benefit analysis and conclude if the project is suitable or not.

Solutions

Expert Solution

The cash flows associated with the project is shown in the following table.

To perform the cost benefit analysis, we to calculate the B/C ratio ( Benefit-cost ratio)

Present value of benefits = $54,077.54

Present value of costs = $18,390.3

B/C ratio = 2.94

The benefit cost ratio is higher than one, which suggests that the present value of benefits is higher than present value of costs. Hence the project is suitable for investment.

Rahul Sunny answered 2 years ago
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