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Imagine that the government imposes a regulation to improve air quality. However, there will be no...

Imagine that the government imposes a regulation to improve air quality. However, there will be no benefits of this policy from today to the next nine years. From year ten onward the benefits are calculated at $34,292 every year after that. What is the present value of the benefits assuming that the discount rate Is 6%?

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Answer #1

As after 9 years the stream of cash flows is perpetual, so, present value of this perpetual stream of cash flows of $34292 at a discount rate of 6% in year 8,

PW = 34292/0.06 (Formula is derived from the infinite sum of geometric progression, where first term is $34292 and common ratio is 1/(1+0.06))

=> PW = $571533.33

Present value of this cash flow in year 0 at discount rate of 6%,

P = PW/(1+0.06)8 = 571533.33/(1.06)8 = $358587.082

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