HW4

You will turn in a typed document with your computer generated worksheet. Here is the spreadsheet. Here is another spreadsheet that shows you how to calculate present value formulas in Excel.

1. The accompanying table (see spreadsheet) shows benefits and costs produced by
two different policies for coping wityh drought: law of the river (LR) and water
banking (WB). LR means that water users with the most recent claim on the river
(most junior) receive no water in low flow periods. WB means that people with the
oldest claim (most senior) are paid to deposit their water into a water bank in a
drought. Juniors can pay to withdraw money from the bank. The table summarizes
the benefits and costs of implementing LR and WB over a three-year drought cycle.
Benefits refer to drought damages avoides; costs are the costs of administering the
program. For your analysis compute the present value net benefit (PVNB) for
each policy using a discount rate of 0.10 (i.e., 10%). Based on your computations, explain
to state officials which of the two programs you recommend; you must explain why
you are making this recommendation. How do your results vary with a 3% interest
rate?
2. An environmental pollution control program is expected to have a lifetime of 50
years. The costs of the program are estimated at $50 million per year for the first
10 years and $20 million per year for years 11 to 50. Benefits are expected to be 0
for the first 10 years and $40 million per year from years 11 to 50. At a discount
rate of 5%, what is the discounted net present value fo the program? What is the
its discounted net present value at 0%? How do you interpret the difference? Are
there any conditions under which you justify the use of a 0% discount rate for the
program?
3. A city is considering putting in a baseball stadium. The spreadsheet shows the
stream of costs and benefits in millions. Year 0 represents the initial investment
while costs for years 1-10 are the maintenance costs incurred at the end of each
year. The benefits are the revenues from sports team contracts and reveneues at
the end of each year. Suppose the interest rate is 10%. Should the city build the
stadium? Excel has a cool function called IRR: this is the discount rate that returns
a net present value of zero. What is the IRR for this pro ject? (To calculate this,
do =IRR(values ) where values is the range of net benefit values (e.g., D2:D12))