(6) THINKING ABOUT COST-BENEFIT ANALYSIS. When evaluating how much to invest on a project the typical...

 

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(6) THINKING ABOUT COST-BENEFIT ANALYSIS. When evaluating how much to invest on a project the typical Present Value (PV) formula is used where R is the discount rate, B, is the benefit, and C, is cost the associated with the project in year t, and n is the number of years associated with the project: PV = t=0 (1+R) (B-C) a. What is the PV of $1 today? In one year (say March 30, 2017), what is the PV of $1 at that time (March 30, 2017)? b. Suppose that Cal is indifferent between receiving $1 today and receiving $1 in one year. What does this suggest about Cal's rate of time preference? Briefly explain. c. Suppose Jay sets a discount rate of zero and Rae sets a discount rate of 10%. Which individual would be willing to spend more in the current period for environmental benefits such as reducing carbon emissions for the next 20 years? Explain your reasoning. d. How does the typical PV calculation treat the value of saving an individual's life today? Is this a shortcoming of PV calculation when it comes to evaluating health benefits associated with an investment? Explain. e. Suppose that the government is evaluating a project. It uses a discount rate for costs of 3% and the discount rate on benefits of 7%. What is the problem with the PV calculation that would arise from these using the different discount rates? Explain. (6) THINKING ABOUT COST-BENEFIT ANALYSIS. When evaluating how much to invest on a project the typical Present Value (PV) formula is used where R is the discount rate, B, is the benefit, and C, is cost the associated with the project in year t, and n is the number of years associated with the project: PV = t=0 (1+R) (B-C) a. What is the PV of $1 today? In one year (say March 30, 2017), what is the PV of $1 at that time (March 30, 2017)? b. Suppose that Cal is indifferent between receiving $1 today and receiving $1 in one year. What does this suggest about Cal's rate of time preference? Briefly explain. c. Suppose Jay sets a discount rate of zero and Rae sets a discount rate of 10%. Which individual would be willing to spend more in the current period for environmental benefits such as reducing carbon emissions for the next 20 years? Explain your reasoning. d. How does the typical PV calculation treat the value of saving an individual's life today? Is this a shortcoming of PV calculation when it comes to evaluating health benefits associated with an investment? Explain. e. Suppose that the government is evaluating a project. It uses a discount rate for costs of 3% and the discount rate on benefits of 7%. What is the problem with the PV calculation that would arise from these using the different discount rates? Explain.

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CostBenefit Analysis and Present Value a Present Value of 1 Today PV 1 1 R0 1 where R is the discoun... View the full answer