12. Suppose a municipal government is trying to determine how to reduce pesticide contamination of its water supply. It undertakes a benefit-cost analysis of two alternative policy options for controlling pesticides: upgrading its municipal water treatment plant to remove the pesticides, and banning the use of pesticides in the municipal area. Both alternatives reduce the pesticides to a level that has no adverse effect on human health; thus, each alternative generates benefits with a total present value of $40 million. The discount rate is 5%. The municipality's planning horizon is 10 years, including the current year. The cost profiles for the two alternatives, in future value terms and in millions of dollars, are in the table below. Upgrading the treatment plant involves construction costs of $20 million. Once the plant begins operation, which it does at the start of year 1, it has operating costs of $1 million per year. Once constructed, the plant lasts for five years, then must be replaced with a new plant; the new construction takes place during year 5, the final of the first plant's life. Which alternative should the municipality adopt? year Year 1 3. 4 5 7. 8 9. Upgrade 20 1 1 21 1 1 1 1 Ban 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 2.
12. Suppose a municipal government is trying to determine how to reduce pesticide contamination of its water supply. It undertakes a benefit-cost analysis of two alternative policy options for controlling pesticides: upgrading its municipal water treatment plant to remove the pesticides, and banning the use of pesticides in the municipal area. Both alternatives reduce the pesticides to a level that has no adverse effect on human health; thus, each alternative generates benefits with a total present value of $40 million. The discount rate is 5%. The municipality's planning horizon is 10 years, including the current year. The cost profiles for the two alternatives, in future value terms and in millions of dollars, are in the table below. Upgrading the treatment plant involves construction costs of $20 million. Once the plant begins operation, which it does at the start of year 1, it has operating costs of $1 million per year. Once constructed, the plant lasts for five years, then must be replaced with a new plant; the new construction takes place during year 5, the final of the first plant's life. Which alternative should the municipality adopt? year Year 1 3. 4 5 7. 8 9. Upgrade 20 1 1 21 1 1 1 1 Ban 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 2.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:12. Suppose a municipal government is trying to determine how to reduce pesticide
contamination of its water supply. It undertakes a benefit-cost analysis of two alternative
policy options for controlling pesticides: upgrading its municipal water treatment plant to
remove the pesticides, and banning the use of pesticides in the municipal area. Both
alternatives reduce the pesticides to a level that has no adverse effect on human health;
thus, each alternative generates benefits with a total present value of $40 million. The
discount rate is 5%. The municipality's planning horizon is 10 years, including the current
year. The cost profiles for the two alternatives, in future value terms and in millions of
dollars, are in the table below. Upgrading the treatment plant involves construction costs
of $20 million. Once the plant begins operation, which it does at the start of year 1, it has
operating costs of $1 million per year. Once constructed, the plant lasts for five
must be replaced with a new plant; the new construction takes place during year 5, the final
year of the first plant's life. Which alternative should the municipality adopt?
years,
then
Year
1
2
3
4
7
8.
Upgrade 20
1
1
21
1
1
1
1
Ban
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
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