Question

A cost benefit analysis of a new CD fence project indicates that the net benefits (B-C) of the project in each of the first three (3) years will be $-2,000,000 (-2 million dollars). Thereafter, the project will yield positive net benefits of $750,000 for the next 23yrs. Alternatively, an education project will yield net benefits of $-1,000,000 (-1 million dollars) for the first year, and positive net benefits of $6,000,000 for the next 10yrs, and $10,000,000 for another 15yrs. A) Calculate the present value of net benefits of the projects when the social rate of discount is 5%. Which project merits approval? How would the present value of the net benefit change if the social rate of discount were 10%? Which project merits approval? B) Would you approve the projects you did in (A), if instead you used the internal rate of return and the benefit cost ratio analysis under the two (2) different social discount rates that is 5% and 10%? The internal rate of return (IRR) is independent of the social rate of discount but the decisions will be based on these rates.

Answer 1