Set-up The cost of installing a new piece of pollution control equipment at a cement factory is $60,000. Engineers and public health officials estimate that if the equipment is installed now (at year o), in every year afterwards (for years 1, 2, 3, ...) it will produce a health benefit of $7,000. There will also be an annual cost of maintenance of $1,000 per year. Questions i. What is the present value of the net benefit of the pollution control equipment in its fourth year of operation, if the discount rate is 6%? ii. If the discount rate were greater than 6%, would this increase or decrease the present value of the net benefit in the fourth year? Explain your reasoning. iii. Suppose you are asked to evaluate this project for a 15-year time horizon. What is the present value of total net benefits if the discount rate is 6%? What if the discount rate is 5%? Assumptions Installation cost Annual cost Annual benefit discount rate (r) Calculations year cost benefit net benefit PV of net benefit 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 total PV of net benefits