Suppose El Centro California decides to tackle the problem of nitrates in the wa
ID: 1168952 • Letter: S
Question
Suppose El Centro California decides to tackle the problem of nitrates in the water. Nitrates are compounds derived from synthetic fertilizers that are not assimilated by plants and leached out into the underground water and affect the human health. The way they decide to do it is to establish a new kind of water filtering technology the initial cost of such technology was 7.2 million in 2015. You are in charge of giving recommendations to the parties involved if this project is feasible.
-In 2016, incremental benefits from reducing nitrates will equal to $6.116 million while incremental cost will be $4.410
-In 2017, incremental benefits from reducing nitrates will equal to $6.211 while incremental cost will be $4.440
-In 2018, incremental benefits from reducing nitrates will equal to $7.1 million while incremental cost will be $4.5
At this time the Inflation rate is expected to be at 3.01 %
Based in this information:
1.- Adjust benefits and cost to 2015 numbers (Example 2015 = time is 1)
2.- Adjust for the opportunity cost of money taking into account a discount rate of 7% for costs and benefits
3.- Calculate the Net present value to the society
4.- Calculate the benefit to cost ratio and interpret both results Explain based on these 2 metrics if the 3 year benefit-cost analysis is feasible.
Explanation / Answer
Year
2015
2016
2017
2018
Initial Cost
-7.2
Incremental benefit
6.116
6.211
7.1
Incremental cost
4.41
4.44
4.5
1.
Incremental cost/benefit to 2015 =P.V of Incremental cost/benefit = Incremental cost or benefit/(1.0301^n)
Where n is the number of years from 2015. Applying above formula
Year
2015
2016
2017
2018
Initial Cost
-7.2
Incremental benefit(2015)
5.937
5.853
6.496
Incremental cost(2015)
4.410
4.440
4.500
2.
Taking discount rate of 7% for adjusting for opportunity cost of money
Incremental cost/benefit to 2015 = Incremental cost or benefit/(1.07^n)
Year
2015
2016
2017
2018
Initial Cost
-7.2
Incremental benefit(2015)
5.716
5.425
5.796
Incremental cost(2015)
4.121
3.878
3.673
3.
Net Present value to Society = -Initial cost+ Total Incremental benefit(2015)- Total Incremental cost(2015)
Net Present value to Society =-7.2+(5.937+5.853+6.496)-(4.410+4.440+4.5)= -$2.264 million
4.
Benefit/Cost= Total Incremental benefit(2015)/( Total Incremental cost(2015)+initial cost)
Benefit/Cost =(5.937+5.853+6.496)/( 7.2+4.410+4.440+4.5)= 0.889829684
Since the Benefit/Cost ratio is less than 1 and NPV to society is negative, 3 year cost benefit analysis will not be feasible
Year
2015
2016
2017
2018
Initial Cost
-7.2
Incremental benefit
6.116
6.211
7.1
Incremental cost
4.41
4.44
4.5
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.