Present value calculations and Discount Rate (8 marks)

Let us assume that your decision to start switching to paper bags instead of plastic bags translate into a total Environmental benefits of $50,000 in 5 years from now. Also, let us assume that the discount rate (r) = 0.5.

a) What is the present value of future benefits that you expect to receive in 5 years from now? ( 2 marks)

b) Suppose the discount rate increases to 0.6. What is the present value of future benefits that you expect to receive in 5 years from now and what can you conclude? (3 marks)

c) Suppose that the cost of switching to paper bags is $4,000 and is constant over time. What are the net present value of future benefits accrued in 5 years when the discount rate r = 0.5 and r=0.6 respectively?