ProblemSet3ESP168a

# ProblemSet3ESP168a - November 9 2010(due Problem Set 3 ESP...

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(due November 23, 2010) Problem Set 3 ESP 168a: Cost Benefit Analysis, Linear Programming 1. Assume that an economist has made analytically sound estimates of the construction cost (\$600,000) and the annual benefits and costs of a large project. The project has a useful life of 5 years, at the end of which time there is a substantial salvage value remaining (shown below as year 5 salvage). The costs and benefits are given below: Year Benefits Costs 0 \$0 \$600,000 1 150,000 40,000 2 150,000 40,000 3 250,000 40,000 4 250,000 40,000 5 250,000 40,000 5salvage 200,000 80,000 1.a. Calculate the present value of the benefits and costs and the net present value of the project (discount rate = 6%). [Net present value = (present value of benefits) - (present value of costs).] Would you recommend this project? 1.b. How important is salvage value to the economics of the project? If the salvage benefits in year 5 were \$50,000 would you still recommend this project. 1c. Does this project look more or less economically attractive with a higher discount

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ProblemSet3ESP168a - November 9 2010(due Problem Set 3 ESP...

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