6. The US EPA has determined that cleaning up the local watershed so it will mee

Question

6.         The US EPA has determined that cleaning up the local watershed so it will meet healthy water standards will cost $300 million. They support their claim for the need to do this project by saying that the economic value of the healthy water to the citizens in the area is $15 million dollars per year in lower health costs, recreation, and quality of life. These benefits are expected to continue for 50 years. The opportunity cost on government money is normally the current rate of treasury bills which is 3%/year. Using Benefit/Cost Analysis determine if this use of government money makes sense. What is the minimum amount of annual benefit that is needed to justify this spending?

Explanation / Answer

NPV = -300 + 15/1.03 + 15/1.03^2 + 15/1.03^3 + 15/1.03^4 ....................15/1.03^50 = $$85.95 miliion

NPV is positive and hence this use of government money makes sense

Let minimum amount = x

For minimum amount, NPV = 0

-300 + x/1.03 + x/1.03^2 + x/1.03^3 + x/1.03^4 ....................x/1.03^50=0

x= $11.66 million

minimum amount of annual benefit that is needed to justify this spending = $11.66 million

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.