Question

An investment of $100 today will avoid $1,000,000 of environmental damage in 100 years.

At a discount rate of 10%, is this investment a good idea?

At a discount rate of 1%, is this investment a good idea?

At a discount rate of 2%, what is the maximum we would be willing to pay to avoid the million dollars of environmental damage in 100 years?

Answer 1

1) FV = 100(F/P, 10%, 100)

         = 100(13781)

         = $1,378,100

Since FV of cost is grater than the FV of benefits, this investment is not a good idea

1) FV = 100(F/P, 1%, 100)

         = 100(2.705)

         = $270.50

Since FV of cost is less than the FV of benefits, this investment is a good idea

3) FV = P(F/P, 2%, 100)

   1,000,000 = P(7.245)

        P = 1,000,000 / 7.245

           = $138,026.22

Thus, the maximum we would be willing to pay to avoid the million dollars of environmental damage in 100 years is $138,026.22.