A proposed project will entail a large capital expenditure in Years 1-3, followe

Question

A proposed project will entail a large capital expenditure in Years 1-3, followed by a series of benefits from years 4 through 30. A benefit cost ratio analysis was conducted for this project using an interest rate of 6.0%, and the computed B/C ratio was equal to 1.3. Later, it was determined that a more appropriate interest rate would be 7.0%. Will the new B/C be less than, equal to, or greater than 1.3? Explain. QUESTION 3 The Benefit/Cost ratio analysis assumes all of the project benefits can be expressed in terms of dollars. Is this always true? Provide an example of a benefit for which it would be difficult or impossible to assign a dollar value.

Explanation / Answer

1) For the first case if interest rate is increasing then future value of the invested amount will increase that means cost will increase. So benifit cost analysis will decrease and it will be less than 1.3.

2) For an example there is a firm which produces some good which can be sold in the market but in this production process it produces some toxic gas which polute enviourment. Now by imposing tax we want to quantify the amount of polution but actually there is no market value for nature. So this damage cannot be measured properly.

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