Question

In: Economics

Consider a proposal to invest $8.55 million into a stretch of wild river preservation in Wyoming....

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

Solutions

Expert Solution

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


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