Question

10. Suppose a municipality is proposing to upgrade its municipal water treatment plant to reduce pesticide contamination of its water supply to a level that does not adversely affect human health. The new plant would be constructed over the course of the initial year (year “0”) at a cost of $15 million. Once the plant begins operating in year “1”, estimated operating and maintenance costs of $3 million will be incurred per year for the life of the plant which is 12 years, and estimated accrued benefits will be $5 million per year. Conduct a benefit-cost analysis to determine whether this project should be considered feasible at a discount rate of 5%. What about a discount rate of 10%? Use Excel to save much time and effort. I have provided a template that you could use. If you prefer to do calculations manually you can complete the table below. Year Benefits Costs Net Benefits in Current Values Net Benefits in Present Values 0 1 2 3 4 5 6 7 8 9 10 11 12

Answer 1

AT 5% B/C Ratio = 1.1818

At 10% B/C Ratio = 0.9085

The project is feasible at 5% but not at 10% since B/C Ratio is lesser than 1

				5%	10%
Year	Benefits	Costs	Net benefits in current values	Net benefits in present values	Net benefits in present values
0		-15	-15	-15	-15
1	5	-3	2	1.904761905	1.818181818
2	5	-3	2	1.814058957	1.652892562
3	5	-3	2	1.727675197	1.502629602
4	5	-3	2	1.64540495	1.366026911
5	5	-3	2	1.567052333	1.241842646
6	5	-3	2	1.492430793	1.12894786
7	5	-3	2	1.42136266	1.026316236
8	5	-3	2	1.353678724	0.93301476
9	5	-3	2	1.289217832	0.848195237
10	5	-3	2	1.227826507	0.771086579
11	5	-3	2	1.169358578	0.700987799
12	5	-3	2	1.113674836	0.637261635
			Benefit/Cost ratio	1.1818	0.9085

WORKINGS