A city has proposed a new waste treatment plant that would eliminate contractor charges of \(\$ 300,000\) each year starting at the beginning of the first year. It will, however, require an end-of-year annual operating cost of 5 percent of the initial investment. The plant would also result in pollution-reduction benefits judged to be \(\$ 450,000\) per year at the end of each year for the next 25 years. The plant will have no salvage value. Interest is usually considered to be 7 percent, since that is what the city's taxpayers can receive on their money, on average. However, since the money for the waste treatment plant is coming from the federal government with a 0 percent interest rate, some members of the city's leadership argue that the applicable interest rate is 0 percent rather than 7 percent. You have been called in to recommend which of the two is the more appropriate interest rate and to do the benefit-cost analysis.

a. What interest rate do you propose be used?

b. Determine the maximum amount the city can afford to pay for the new waste treatment plant such that the benefit/cost ratio is over 1.0. Show all work, and use a benefit/cost ratio approach.