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The Environmental Protection Agency is considering a new regulatory policy that will cost $40 million this...

The Environmental Protection Agency is considering a new regulatory policy that will cost $40 million this year and generate $42 million in benefits next year. The EPA has determined that 4% is the appropriate discount rate in this case. Should this regulatory policy be implemented, and why or why not?

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Answer #1

Ans. The regulatory policy should only be implemented if the present value of the benefits equal the present value of the cost. So, present value of the benefit at 4% interest rate,

B = 42 million/(1+0.04)

=> B = $40.3846 million

The present value of the benefits is greater than the cost of $40 million. Thus, it is beneficial to implement the new regulatory policy.

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