## COST BENEFIT ANALYSIS. Original and complete work only please. Please use attached Excel sheet as template

COST BENEFIT ANALYSIS Original and complete work only please. Please use attached Excel sheet as template.

1. Imagine that you are faced with three alternative projects, each of which costs $1,000. Assuming the discount rate of 15 percent, calculate the following for each of the projects: Discounted Benefits, Discounted Costs, Net Present Value (NPV) and Benefit Cost Ratio (BCR). Which one of these projects would you choose to undertake based on the BCR? Explain your answer (4.5 points total).

a. A bridge which takes five years to build, then yields $500 benefit per year for the next 10 years. All benefits are received at the end of the year. Assume that the costs are spread out evenly over the first five years and are paid at the end of each year.

b. Temporary classrooms for schools yielding $500 benefit per year for three years. All benefits are received at the end of the year. Assume that all costs are paid at the end of year 1.

c. Tax breaks per year to a foreign auto manufacturer for a new auto plant yielding $200 annual benefit for 30 years. All benefits are received at the end of the year. Assume that all costs are paid up front.

2. Assuming the discount rate of 5 percent, calculate the following for each of the projects: Discounted Benefits, Discounted Costs, Net Present Value (NPV) and Benefit Cost Ratio (BCR). Which one of these projects would you choose to undertake based on the BCR? Explain your answer (1.5 points total).

3. Assuming the discount rate of 55 percent, calculate the following for each of the projects: Discounted Benefits, Discounted Costs, Net Present Value (NPV) and Benefit Cost Ratio (BCR). Which one of these projects would you choose to undertake based on the BCR? Explain your answer (1.5 points total).

Things to Keep in Mind

1. This is an individual assignment, which means that you need to do your own research and calculations. Original work only.

2. Please note that when you are calculating the Discount Factors for the 55% discount rate, your Discount Factors for some years would be close to zero. Still, however, you should calculate the discount factors for all the relevant years in excel.

3. If costs of a project are paid up front, you need to list them under Year 0, not under Year 1.

>Sheet

1 Future Benefits PV (Future Benefits) Future Costs PV (Future Costs) Future Benefits PV (Future Benefits) Future Costs PV (Future Costs)

2

n | Discount Factor | Alternative A | Alternative B | Alternative C | ||||||||

Future Benefits | PV (Future Benefits) | Future Costs | PV (Future Costs) | |||||||||

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TOTAL | ||||||||||||

NPV | ||||||||||||

BCR |