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Benefit-Cost Analysis

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Benefit-Cost Analysis

Continuing with

style=”color:rgb(0,0,0);background-color:rgb(238,238,238);”>overproduction of corn in Week 1, follow the steps to conduct a benefit-cost analysis for a defined policy initiative to reduce this environmental concern. You will complete individual work to submit; however, you and your group can consult and help each other if you have any questions.Here are the Benefit-Cost Analysis Instructions which contains templates for computing the present value of your stream of hypothetical benefits and costs over a five year time frame. 

Examples of a Benefit Cost Analysis (BCA) are provided in the Week 4 Lesson and in Chapter 9 of the textbook. For instance, suppose that a proposal to solve your environmental concern (e.g., clean up a polluted river and convert it to a boatable/swimmable river) is expected to generate $400,000 (or any amount you see fit to use) in benefits every year starting at the end of Year 1 and for each of the following 4 years. Calculate the Present Value of Benefits (PVB) of this project using a discount rate of 7%. Next calculate the PVB using a discount rate of 3%. You want to use the PV formula:

PV = FV * (1÷ (1 + r)^yr).  

If the cost of improving the environmental concern is $1,800,000 (or any amount you see fit to use) which is expended in the current year the present, then the PV of Costs (PVC) is simply $1,800,000. If additional cost will be incurred during each of the next 4 years, then you will need to discount those costs to present value. Once you have summed the PVB and the PVC over the 5 year period of this project you would be able to assess if the project is feasible!

In your assignment, use the Present Value of Net Benefits (PVB – PVC) to support your decisions. Explain how this differs from the benefit-cost ratio. Discuss the importance of choosing the social discount rate and how society may be inappropriately discounting the benefits of environmental sustainability. Discuss the limitations of benefit-cost analysis that are of concern to this particular situation.

 
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