(a) Calculate the present values of the below future cost and benefits associated with a conservation project at discount rates of 3%, 5% and 10%. (i) $3,000 cost in 10 years’ time (ii) $5,000 benefit in 20 yews’ time (iii) Using the calculations io pans (i) and (ii), identify if the net benefits are positive or negative for each discount late. [Hint: Discounted PV of Benefits — Discmmted PV of Cos.]
(b) A project to reduce water pollution from a food processing plant has the following potential trade-offs, as well as different likelihoods of each occurring: • $200,000 benefit in 5 years, with 60% likelihood of occurrence • $40,000 cost now, with 95% likelihood of occurrence • $400,000 cost in 40 years’ time, with 20% likelihood of occurrence
Use the expected value approach to estimate the net present value of the project at discount rates of 3%, 5% and 10%.
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