Lecture3_3509 - Discounting & Dealing with Time 1...

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1 Discounting & Dealing with Time
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2 (see Appendix for some info.) Typical public sector projects like dams, bridges and hydroelectric facilities have similar life cycles of costs and benefits: Early in the life of a project, many capital costs are incurred: engineering, design, construction. This could take several years. Only after the project has been built, the society starts to benefit from, for example, flood protection, irrigation, faster transportation, cheaper power. This second stage can last decades. In addition to the benefits, there are some costs associated to operation and maintenance. Like many factories and buildings, these infrastructure deteriorate they have a finite economic life
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3 Q: how is the time profile of the costs/benefits of a nuclear power plant?
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4 Dealing with Time Analysts should be able to evaluate all benefits and costs during the project economic life. One option: sum all benefits and subtract all costs. If the result is positive, the project is economically viable. If negative, not viable. Problem: society values differently a dollar today and a dollar tomorrow Other option, discounting.
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Future Value Peter won a lottery and is offered two choices: $800,000 today $100,000 today, $300,000 a year from today, and $500,000 two years from today. Assume an interest rate of 10% (both for
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This note was uploaded on 05/27/2010 for the course ECON ECON 3509 taught by Professor Pablo during the Winter '09 term at Carleton CA.

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Lecture3_3509 - Discounting & Dealing with Time 1...

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