Question
Suppose a municipal government is trying to determine how to reduce pesticide contamination of its water supply. It undertakes a benefit-cost analysis of two alternative
Suppose a municipal government is trying to determine how to reduce pesticide contamination of its water supply. It undertakes a benefit-cost analysis of two alternative policy options for controlling pesticides: upgrading its municipal water treatment plant to remove the pesticides, and banning the use of pesticides in the municipal area. Both alternatives reduce the pesticides to a level that has no adverse effect on human health; thus, each alternative generates benefits with a total present value of $40 million. The discount rate is 5%. The municipality's planning horizon is 10 years, including the current year. The cost profiles for the two alternatives, in future value terms and in millions of dollars, are in the table below. Upgrading the treatment plant involves construction costs of $20 million. Once the plant begins operation, which it does at the start of year 1, it has operating costs of $1 million per year. Once constructed, the plant lasts for five years, then must be replaced with a new plant; the new construction takes place during year 5, the final year of the first plant's life. Which alternative should the municipality adopt?
\begin{tabular}{|l|l|l|l|l|l|l|l|l|l|l|} \hline Year & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 \\ \hline Upgrade & 20 & 1 & 1 & 1 & 1 & 21 & 1 & 1 & 1 & 1 \\ \hline Ban & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|l|l|l|l|l|l|l|} \hline Year & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 \\ \hline Upgrade & 20 & 1 & 1 & 1 & 1 & 21 & 1 & 1 & 1 & 1 \\ \hline Ban & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 & 3.5 \\ \hline \end{tabular}Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started