CBA Exam 3

# CBA Exam 3 - 1Methods of Cost-Benefit Analysis Professor...

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1Methods of Cost-Benefit Analysis, Professor Russell Answers to Quiz, October 13, 2011 1. (25 points) Write out the formula for net discounted benefits and define each term in it. The formula for net discounted benefits (or net present value) is where B t is the benefit in year t, C t is the cost in year t, t denotes the year, r is the discount rate, and T is the number of years covered by the project (the time horizon). 2. (25 points) Suppose the net discounted benefits of a project are positive but close to zero in the base-case analysis, which used a real discount rate of 7%. How confident would you be of recommending the project? What could you do to explore whether you should be confident or cautious? If the net discounted benefits are close to zero that suggests that fairly small changes in the base-case parameters, such as the discount rate, might make net benefits negative, so I would not be confident. If the real world turned out to be

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