Suppose you are doing a benefit-cost analysis of three alternative proposals for

Question

Suppose you are doing a benefit-cost analysis of three alternative proposals for a vacant
site. Proposal A (petting zoo) would yield net benefits of $30, $35, $40 and $15 in the
first four years, and then zero net benefits after that. Proposal B (condos) would yield an
up-front net benefit of $110, and zero net benefits in subsequent years. Proposal C
(nature preserve) would yield a net benefit stream of $5 per year forever. Calculate the
net present value (NPV) of each proposal when r = 0.04, r = 0.06 and r = 0.08. Which
proposal has the highest NPV under each discount rate?

Explanation / Answer

NPV=a+b/(1+r)+c/(1+r2)+................

NPV for a=113.97

for b=110

for c=130

so PROJECT C HAS HIGHEST NPV VALUE FOR r=0.04

FOR r=0.06

a=111.21

b=110

c=88.33

so for r=0.06 A has highest NPV

FOR r=0.08

a=108.61

b=110

c=67.5

so for r=0.08 B has highest NPV

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