COST-BENEFIT ANALYSIS ECON CLASS

Reference - Boardman et al., Cost-benefit Analysis: Concepts and Practice. 4th Ed.

Exercise 5: Expected costs and benets Imagine that, with a discount rate of 5 percent, the net present value of a hydroelectric plant with a life of 70 years is $25.73 million and that the net present value of a thermal electric plant with a life of 35 years is $18.77 million. Rolling the thermal plant over twice to match the life of the hydroelectric plant thus has a net present value of 18.77m + To.im > 22.17m. Now assume that at the end of the first 35 years, there will be an improved second 35-year plant. Specifically, there is a 30 percent chance that an advanced solar or nuclear alternative will be available that will increase the net benefits by a factor of three, a 60 percent chance that a major improvement in thermal technology will increase net benefits by 50 percent, and a 10 percent chance that more modest improvements in thermal technology will increase net benefits by 10 percent. Should the hydroelectric or thermal plant be built today? How would you graph a Monte Carlo histogram for this project