In order to evaluate the economic merits of cafe standards

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Reference no: EM132152961

In order to evaluate the economic merits of CAFE standards of 35 mpg, the following data was collected by your research team:

1. On-time Research & Development R&D cost and other initial investment expenditures are estimated to be $500M, with half of that amount occurring during the first year and the other half over the second year.

2. New cars will cost $100 more, and that there will be 10M cars sold per year.

3. It is expected that there would be 100 more fatalities per year in traffic accidents. Life is valued at $3M on average.

4. Individuals will use $10 less in gas/year. Assume there are 100M cars in the US and that all cars get the same savings of $10 every year.

5. The new CAFE standards is expected to reduce pollution of the environment, which is valued at $225M/year.

6. It is also expected that the military budget will be reduced by $100M/year because the US will conduct less military actions in the Persian Gulf.

7. Assume all future payments, benefits or costs, other than the cost of R&D and the initial investment expenditures, will occur in perpetuity, starting in year 3.

8. You are required to evaluate this program using a social discount rate (r) of 10%.

Required work:

A. Clearly categorize the input above into the project costs and benefits; then, compute the Net Present Discounted Value (i.e., PDV of social net marginal benefit) of the project.

B. Based on your results in (A), which result suggests the project should be accepted or rejected.

Reference no: EM132152961

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