Marginal Analysis Problems
- A government agency must decide whether to buy a computer which costs $80,000. The machine is likely to be obsolete at the end of three years, with no salvage value. During those years it will return annual net benefits (i.e., benefits over and above operating expenses) of $40,000 at the end of the first year; $40,000 at the end of the second year; and $20,000 at the end of the third year.
What is the present value of the net benefits of the computer in #1 if the discount rate is 10%?
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- What is the present value of the net benefits of the computer in #1 if the discount rate is 15%?
- The state of New York is building a dam on a short river. Only one dam can be built, and two mutually exclusive sites for it are being considered. After monetizing all the benefits, the time streams for the two sites are as follows:
| Now | Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 | ||
| Site | costs | 3.million | 0.9 million | 0.8 million | 0.4 million | 0.4 million | 0.2 million |
| A | benefits | —- | 0.2 million | 1.8 million | 1.9 million | 3.6 million | 4.2 million |
| Site | costs | 4 million | 1 million | 0.8 million | 0.7 million | 0.4 million | 0.4 million |
| B | benefits | —- | 1 million | 2.8 million | 3.7 million | 3.9 million | 6.4 million |
At a discount rate of 11%, what is the present value of the net benefits of site A?
What is the present value of the net benefits of site B?
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