A cost-benefit analysis of a new irrigation project indicates that the net benefits of the project in each of the first four years will be -$2 million. That is, Bi - Ci = -2 million for i = 1, 2, 3, 4. Thereafter, the project will yield positive net benefits of $750,000 each year for the next 21 years, i.e. Bi - Ci = .75 million for i = 5...25.
a. Calculate the present value of net benefits when the social rate of discount is 10%. (Assume that the net benefits in year i are received at the end of year i in this and other problems.)
b. Explain whether the program merits approval on the basis of this information.
c. How is the present value of the net benefits changed if the social rate of discount is 5%? Explain why.