Economics Cost-Benefit Analysis: The Los Angeles area has long been plagued by urban smog. Suppose that...

Economics Cost-Benefit Analysis:

The Los Angeles area has long been plagued by urban smog. Suppose that one of several ozone-reducing policy options is being evaluated by economists using benefit-cost analysis.

Since the policy will be implemented over time, economists assume that per resident benefits will accrue in increments of $500 at the end of each of the next three years. Find the present value of benefits (PVB) for each resident, assuming an annual discount rate of 9%.

Solutions

Expert Solution

Annual benefit of $500 for 3 years

Discount rate = 9% (0.09)

Present value of annual benefit in 1st year = [500 / 1.09^¹] = 458.72

Present value of annual benefit in 2nd year = [500 / 1.09^²] = 420.84

Present value of annual benefit in 3rd year = [500 / 1.09^³] = 386.09

Sum of presennt value of annual benefit = 458.72 + 420.84 + 386.09 = 1,265.65

Rahul Sunny answered 1 year ago

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