A county would like to estimate the net benefits of a park to its users. The cur

Question

A county would like to estimate the net benefits of a park to its users. The current manager of the park estimates the maintenance cost of the park to be $90,000 per year. An analyst estimated that the park would generate $120,000 per year in benefits to its visitors. Assuming that the yearly benefits, which are measured in real dollars, accrue at the end of each of the 15 years, the maintenance cost is the only cost at the end of each year of the 15 years and that the appropriate real discount rate is 4 percent, calculate the net benefits of park. (Hint: You can use the formula for the present value of an annuity).

Explanation / Answer

The present value of annuity is calculated using the formula

PVA = A [ ( 1+r)n -1 ] / r ( 1+r)n

PVA = $ 30,000 [ ( 1+0.04)15 -1 ] / 0.04 ( 1+0.04)15

PVA = $ 333,551.60

Year Cash Inflows Cash outflows Net benefits 1 $120,000 $90,000 $30,000 2 $120,000 $90,000 $30,000 3 $120,000 $90,000 $30,000 4 $120,000 $90,000 $30,000 5 $120,000 $90,000 $30,000 6 $120,000 $90,000 $30,000 7 $120,000 $90,000 $30,000 8 $120,000 $90,000 $30,000 9 $120,000 $90,000 $30,000 10 $120,000 $90,000 $30,000 11 $120,000 $90,000 $30,000 12 $120,000 $90,000 $30,000 13 $120,000 $90,000 $30,000 14 $120,000 $90,000 $30,000 15 $120,000 $90,000 $30,000

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