Calculate net net present value of costs and benefits over multiple years

Posted on 2013-11-21 16:18:00 in Economics by SAM SAUCE

Assume that an economist has made analytically sound estimates of the construction cost ($600,000) and the annual benefits and costs of a large project. The project has a useful life of 5 years, at the end of which time there is a substantial salvage value remaining (shown below as year 5 salvage). The costs and benefits are given below:



Year Benefits Costs

0 $0 $600,000

1 150,000 40,000

2 150,000 40,000

3 250,000 40,000

4 250,000 40,000

5 250,000 40,000

5salvage 200,000 80,000



1.a. Calculate the present value of the benefits and costs and the net present value of the project (discount rate = 6%). [Net present value = (present value of benefits) - (present value of costs).] Would you recommend this project?

1.b. How important is salvage value to the economics of the project? If the salvage benefits in year 5 were $50,000 would you still recommend this project.

1c. Does this project look more or less economically attractive with a higher discount rate?



Do I first get the net benefit (Benefit - cost) for each year and then calculate the present discounted value of each net benefit? or calculate the PDV for costs and benefits separately? Please show me how to solve this so I can see if I did this right. Thank you!!!!

---

Answer Comment

No Answers Posted Yet.