Cost Benefit Analysis

Problem set – Cost Benefit Analysis

Please answer the following three questions.   Show formulas and your calculations.

1. An emission control system for a new car costs $800 and reduces NOx emissions from 0.4 g/mile to 0.23 g/mile. Assume the car is driven 10000 miles per year, and the life of the emissions control system is 11 years with zero scrap value
   What is the annualized cost of this system in dollars per year if the discount rate (interest rate) is 5% per year? $ ______per year
   What is the cost per 100 miles driven? $____
   What is the cost per metric ton of NOx removed? $_____
2. Two remediation options are being considered for a contaminated land area formerly used for industrial operations. Option 1 involves removing all of the contaminated soil over a two year period at a cost of $2.2 million per year. Option 2 is to leave the soil in place but treat it with a bioremediation agent at a cost of $960,000/year over a three year period. Subsequently, the soil would be sampled each year for the next five years to ensure the effectiveness of the treatment system. The cost of the sampling program would be $250,000 for the first year and $100,000/year for the remaining four years.
   1. Draw a cash flow diagram for each of the two options.
   2. Calculate the net present value of each option based on a discount rate of 6% per year.
   3. Which option has the lower overall cost? What is the difference in percentages?

1. Battery powered electric vehicles (EV) have been introduced in some parts of the world to reduce urban air pollution. Assume the electrical energy required to recharge the batteries is 0.5 kW-hr/mile and the car is driven 10,000 miles per year.
   1. If the capital cost of the EV is $30,000, compare its total life cycle cost over seven years to that of a gasoline powered car costing 20,000. Assume both vehicles are financed at an interest rate of 8%, and other annual expenses are as shown below.

 

Cost item	Conventional vehicle	Electric Vehicle
Purchase price	$20,000	$30,000
Fuel consumption	28 mi/gallon	0.5 kW-hr/mi
Fuel cost	$1.40/gal	8.3cents/kW-hr
Annual travel	10,000 mi	10,000 mi
Insurance	1,000/yr	1,000/yr
License and fees	$50/yr	$50/yr
Maintenance repairs	$150/yr	$150/yr
Parking and tolls	$300/yr	$300/yr
Resale value	$2,000	$3,000

 

 

 

 

 

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