In: Economics
Consider a proposal to invest $8.55 million into a stretch of wild river preservation in Wyoming. The project would require periodic capital expenditures as well as annual maintenance expenditures. Benefits from river restoration range from current recreational use to flood prevention to potential future fishing and floating benefits as well as societal benefits from knowing wild stretches of river exist and will be passed on to future generations. Following current best practices for benefit estimation, the following set of costs and benefits are reported for the project.
Year |
Time Period |
Capital Costs |
Maintenance Costs |
Recreation Benefits |
Flood Prevention Benefits |
Reserve the right to fish the river benefits |
Reserve the right to float the river benefits |
Benefits from knowledge the stretch of river system is preserved |
Benefits from leaving preserved river system to future generations |
1 |
0 |
$550,000 |
$50,000 |
$5,000 |
$75,000 |
$80,000 |
$45,000 |
$175,000 |
$85,000 |
2 |
1 |
$550,000 |
$75,000 |
$7,500 |
$75,000 |
$82,500 |
$46,000 |
$180,000 |
$87,500 |
3 |
2 |
$0 |
$100,000 |
$10,000 |
$75,000 |
$85,000 |
$47,000 |
$185,000 |
$90,000 |
4 |
3 |
$0 |
$125,000 |
$12,500 |
$75,000 |
$87,500 |
$48,000 |
$190,000 |
$92,500 |
5 |
4 |
$0 |
$150,000 |
$15,000 |
$75,000 |
$90,000 |
$49,000 |
$195,000 |
$95,000 |
6 |
5 |
$350,000 |
$175,000 |
$17,500 |
$75,000 |
$92,500 |
$50,000 |
$200,000 |
$97,500 |
7 |
6 |
$350,000 |
$200,000 |
$20,000 |
$125,000 |
$95,000 |
$51,000 |
$205,000 |
$100,000 |
8 |
7 |
$0 |
$225,000 |
$20,000 |
$125,000 |
$97,500 |
$52,000 |
$210,000 |
$102,500 |
9 |
8 |
$0 |
$250,000 |
$20,000 |
$125,000 |
$100,000 |
$53,000 |
$215,000 |
$105,000 |
10 |
9 |
$0 |
$275,000 |
$20,000 |
$125,000 |
$102,500 |
$54,000 |
$220,000 |
$107,500 |
11 |
10 |
$250,000 |
$300,000 |
$20,000 |
$125,000 |
$105,000 |
$55,000 |
$225,000 |
$110,000 |
12 |
11 |
$250,000 |
$325,000 |
$20,000 |
$125,000 |
$107,500 |
$56,000 |
$230,000 |
$112,500 |
13 |
12 |
$0 |
$350,000 |
$30,000 |
$125,000 |
$110,000 |
$57,000 |
$235,000 |
$115,000 |
14 |
13 |
$0 |
$375,000 |
$30,000 |
$125,000 |
$112,500 |
$58,000 |
$240,000 |
$117,500 |
15 |
14 |
$0 |
$400,000 |
$30,000 |
$175,000 |
$115,000 |
$59,000 |
$245,000 |
$120,000 |
16 |
15 |
$250,000 |
$425,000 |
$30,000 |
$175,000 |
$117,500 |
$60,000 |
$250,000 |
$122,500 |
17 |
16 |
$250,000 |
$450,000 |
$30,000 |
$175,000 |
$120,000 |
$61,000 |
$255,000 |
$125,000 |
18 |
17 |
$0 |
$475,000 |
$30,000 |
$175,000 |
$122,500 |
$62,000 |
$260,000 |
$127,500 |
19 |
18 |
$0 |
$500,000 |
$50,000 |
$175,000 |
$125,000 |
$63,000 |
$265,000 |
$130,000 |
20 |
19 |
$0 |
$525,000 |
$50,000 |
$175,000 |
$127,500 |
$64,000 |
$270,000 |
$132,500 |
Assume the discount rate is 8%. Complete the following table using only "use" values (First 4 Benefit columns)
1. Discounted present value of net benefits
2. Discounted present value of costs
3. Discounted present value of benefits
4. Benefit-Cost Ratio
Year | Time Period | Total benefits | Present worth of the benefits | Total costs | Present worth of the costs | Net Benefits | Present value of net benefits |
1 | 0 | $465,000 | $465,000 | $600,000 | $600,000 | ($135,000) | ($135,000) |
2 | 1 | $478,500 | $443,056 | $625,000 | $578,704 | ($146,500) | ($135,648) |
3 | 2 | $492,000 | $421,811 | $100,000 | $85,734 | $392,000 | $336,077 |
4 | 3 | $505,500 | $401,282 | $125,000 | $99,229 | $380,500 | $302,053 |
5 | 4 | $519,000 | $381,480 | $150,000 | $110,254 | $369,000 | $271,226 |
6 | 5 | $532,500 | $362,411 | $525,000 | $357,306 | $7,500 | $5,104 |
7 | 6 | $596,000 | $375,581 | $550,000 | $346,593 | $46,000 | $28,988 |
8 | 7 | $607,000 | $354,179 | $225,000 | $131,285 | $382,000 | $222,893 |
9 | 8 | $618,000 | $333,886 | $250,000 | $135,067 | $368,000 | $198,819 |
10 | 9 | $629,000 | $314,657 | $275,000 | $137,568 | $354,000 | $177,088 |
11 | 10 | $640,000 | $296,444 | $550,000 | $254,756 | $90,000 | $41,687 |
12 | 11 | $651,000 | $279,203 | $575,000 | $246,608 | $76,000 | $32,595 |
13 | 12 | $672,000 | $266,860 | $350,000 | $138,990 | $322,000 | $127,871 |
14 | 13 | $683,000 | $251,138 | $375,000 | $137,887 | $308,000 | $113,251 |
15 | 14 | $744,000 | $253,303 | $400,000 | $136,184 | $344,000 | $117,119 |
16 | 15 | $755,000 | $238,007 | $675,000 | $212,788 | $80,000 | $25,219 |
17 | 16 | $766,000 | $223,588 | $700,000 | $204,323 | $66,000 | $19,265 |
18 | 17 | $777,000 | $209,999 | $475,000 | $128,378 | $302,000 | $81,621 |
19 | 18 | $808,000 | $202,201 | $500,000 | $125,125 | $308,000 | $77,077 |
20 | 19 | $819,000 | $189,772 | $525,000 | $121,649 | $294,000 | $68,123 |
Total | $6,263,858 | $4,288,429 | $1,975,429 |
As we can see from the above table, the total costs, total benefits and net benefits have been calculated for the respective years.
Total benefits = sum of all benefits for the respective year
Total costs = sum of all costs for the respective year
Net benefits = sum of all benefits for the respective year - sum of all costs for the respective year
1.
Discounted present value of net benefits = sum of all entries in the present value of net benefits coloumn
Present value of net benefits = net benefits for the respective year / (1+0.08)time period
Therefore, from the above table, we can see that Discounted present value of net benefits = $1,975,429
2.
Discounted present value of costs = sum of all entries in the present value of total costs coloumn
Present value of costs = total costs for the respective year / (1+0.08)time period
Therefore, from the above table, we can see that Discounted present value of costs = $4,288,429
3.
Discounted present value of benefits = sum of all entries in the present value of total benefits coloumn
Present value of benefits = total benefits for the respective year / (1+0.08)time period
Therefore, from the above table, we can see that Discounted present value of benefits= $6,263,858
4.
The benefit cost ratio is calculated by dividing the present value of the total benefits by that of total costs.
Therefore, BCR = present value of total benefits / present value of total costs
= $6,263,858 / $4,288,429
= 1.46