Compute the Benefit-Cost Ratio

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Long Term Investments

The city of Carlsbad is considering installing several offshore wind turbines, in part to help generate power for its ocean water desalination plant. The wind turbines will last for many years but the city officials want to be able to say that the turbines paid for themselves before the next election in four years. The turbines will cost $1,000,000 this year (t=0), and will come online to produce annual cost savings of $350,000 next year, the following year, and the year after that (t=1,2,3).

1. Suppose the interest rate is 5%, compute the net present value (NPV) of the investment with this discount rate.

2. Compute the Benefit-Cost Ratio.

3. Fearing a recession, suppose that the Federal Reserve lowers interest rates to 2% , so you are able to fund the project with a 2% discount rate. Recompute the benefit-cost ratio with this discount rate. (Assume that recession fears don't otherwise change your decision problem).

Reference no: EM134027757

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