3. Consider the following costs and benefits associated with two treatments, A and B. Costs and benefits are in dollars

Costs

Treatment	Yr 1	Yr2	Yr3
A	100	700	400
B	400	300	200

Benefits

Treatment	Yr 1	Yr2	Yr3
A	300	400	900
B	500	600	100

A. Assuming a discount rate of 5% and no discounting applied in Yr 1, calculate the present value of net benefits for each treatment.

Ans.

B. If the treatments are stopped after Yr 2, which treatment do you prefer? Why?

C. Assume a really large discount rate-- 100%.Calculate the present value of net benefits (use all three years and don't discount for the first year)

D. How does the higher discount rate affect the net present value? Does it affect which treatment you prefer?