A federal agency received a recommendation to raise Corporate Average Fuel Economy standards to 35mpg. To evaluate recommendation, the agency started performing cost-benefit analysis and collected the following facts: Costs: 1. one-time R&D cost of $500M 2. new cars cost $100 more (10M cars sold per year) = $1B/yr 3. 100 more fatalities per year in traffic accidents (value of life is $3M) = $300M/yr Benefits: 1. individuals use $10 less in gas/year (100M cars in US; to be totally accurate, only 10M cars have gas savings the first year, 20M the second year, but to keep the problem easy, assume all cars get the savings every year) = $1B/yr 2. less pollution in environment (valued at $225M/yr) 3. lower military budget because US takes less action in Persian Gulf ($100M/yr). Assume that a discount rate is 5%.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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A federal agency received a recommendation to raise Corporate Average Fuel Economy standards to 35mpg. To evaluate the
recommendation, the agency started performing cost-benefit analysis and collected the following facts:
Costs:
1. one-time R&D cost of $500M
2. new cars cost $100 more (10M cars sold per year) = $1B/yr
3. 100 more fatalities per year in traffic accidents (value of life is $3M) = $300M/yr
Benefits:
1. individuals use $10 less in gas/year (100M cars in US; to be totally accurate, only 10M cars have gas
savings the first year, 20M the second year, but to keep the problem easy, assume all cars get the savings
every year) = $1B/yr
2. less pollution in environment (valued at $225M/yr)
3. lower military budget because US takes less action in Persian Gulf ($100M/yr).
Assume that a discount rate is 5%.
The present value of total benefit is $(
The present value of total costs is $
Then, the present value of net benefit is $
B*(1+
M + $(
)/
B*(1+
M. Hint: Don't use thousands separators.
Transcribed Image Text:A federal agency received a recommendation to raise Corporate Average Fuel Economy standards to 35mpg. To evaluate the recommendation, the agency started performing cost-benefit analysis and collected the following facts: Costs: 1. one-time R&D cost of $500M 2. new cars cost $100 more (10M cars sold per year) = $1B/yr 3. 100 more fatalities per year in traffic accidents (value of life is $3M) = $300M/yr Benefits: 1. individuals use $10 less in gas/year (100M cars in US; to be totally accurate, only 10M cars have gas savings the first year, 20M the second year, but to keep the problem easy, assume all cars get the savings every year) = $1B/yr 2. less pollution in environment (valued at $225M/yr) 3. lower military budget because US takes less action in Persian Gulf ($100M/yr). Assume that a discount rate is 5%. The present value of total benefit is $( The present value of total costs is $ Then, the present value of net benefit is $ B*(1+ M + $( )/ B*(1+ M. Hint: Don't use thousands separators.
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