Question

The Los Angeles area has long been plagued by urban smog. Suppose that one of several ozone-reducing policy options is being evaluated by economists using benefit-cost analysis. 1.) Since the policy will be implemented over time, economists assume that per resident benefits will accrue in increments of $500 at the end of each of the next three years. Find the present value of benefits (PVB) for each resident, assuming an annual discount rate of 9%. (2 pts.)

Answer 1

The present value of benefits (PVB) for each resident if there's an annual discount rate of 9% is $1477.

Increment in year 1 will be:

= $500 × (1 + 9%)

= $500 × 1.09

= $545

Increment in year 2 will be:

= $500 × (1 + 9%)²

= $594.05

Increment in year 3 will be:

= $500 × (1 + 9%)³

= $647.52

Therefore, the PVB nominal will be:

= 520/1.09 + 594.05/1.1881 + 647.52/1.295

= $477 + $500 + $500

= $1477

In conclusion, the present value if benefits is $1477.

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