Suppose you work for a local government as a manager in the department of utilities and water services. The municipality is trying to determine how to deal with pesticide contamination of its water supply. It wants to undertake a benefit-cost analysis of two alternative policy options for controlling pesticides:

Option A) Municipal treatment upgrades: Capital costs=$2 million. The new plant is constructed over the course of the initial year. Then it starts operating at the beginning of next year. Once the plant begins operation, it has operating costs of $1 million per year. Once constructed, the plant lasts for five years. 4

Option B) Pesticide ban: Annual operating costs due to substitution of non-toxic methods of controlling pests = 3.5 million each year. Since no new construction is involved with this option, it is implemented in the initial year.

Let the discount rate be 5%. The municipalitys planning horizon is 5 years. Suppose present value of the benefits (regardless of which option is used) of either option are $10 million.

a)What is the present value of net benefits of Option A)?

b)What is the present value of net benefits of Option B?