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Economic III-4

A cost-benefit analysis of a new irrigation project indicates that the net benefits = Benefit - Cost (B-C) of the project in each year will be $20 million. This project will yield benefits for 10 years. Calculate the present value of benefits minus costs when the social rate of discount is 10%. Does the program merit approval? How would the present value of the net benefits change if the social rate of discount were 15%? You can use spreadsheet software, such as MS Excel, to do the calculation. After that, copy and paste it into a MS Word document, write your answer in the MS Word document, and upload it to Blackboard.

Solution Preview

Please see the attached file

Discount Rate 10%

Year Benefit (MM) PV (MM)
1 $ 20.00 $ 18.18
2 $ 20.00 $ 16.53
3 $ 20.00 $ 15.03
4 $ 20.00 $ 13.66
5 $ 20.00 $ 12.42
6 $ 20.00 $ 11.29
7 $ 20.00 $ 10.26
8 $ 20.00 $ 9.33
9 $ 20.00 $ 8.48
10 $ 20.00 $ 7.71
$ 122.89 <- npv

Discount Rate 15%

Year Benefit (MM) PV (MM)
...

Solution Summary

The cost benefit analysis for new irrigations are examined.

$2.19