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# Chap011 - Chapter 11 Cost-Benefit Analysis Chapter 11 Cost...

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Chapter 11 – Cost-Benefit Analysis Chapter 11 – Cost Benefit Analysis 1. Yes, one really must ask these questions, although it may seem distasteful. Otherwise, there is no way to determine which safety precautions are sensible. 2. The increased time spent at the inspection must be counted as a cost of the program. One reasonable way to estimate the value of the time would be to use the average wage rate in the state, and multiply this by the incremental waiting time of 105 minutes. 3. The present value of \$25/.10 = \$250. The present value of the perpetual annual benefit = B + B/(1 + r) + B/(1 + r) 2 + … = B (r + 1 - r)/r = B/r. 4. a. 1,000=80/ ρ ρ =.08 b. If the money comes from consumer spending, use after-tax rate of interest as the discount rate: 80 - 1,000 = 600 0. .05 The project is admissible. If the money comes from investment, use before-tax rate of interest as the discount rate: 80 - 1,000 = -200 < 0. .10 The project is not admissible. In the “mixed case,” for a discount rate, take a weighted average: .6 x 10% + .4 x 5% = 8%.

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