Consider a three-year project with the following costs and benefits:
First cost = $5 million
Annual cost = $500,000 per year
Benefit = $2 million per year
(a) Using a spreadsheet, determine the present worth of the annual costs and benefits at a discount rate of 5% per year, and compute the benefit/cost ratio.
(b) Now do the following sensitivity analysis. Compute the benefit/cost ratio of the above project for all possible combinations of discount rate and annual cost, if the discount rate can be either 3% or 5% per year, and the annual cost can be $500,000, $700,000, or $1 million. Display your results in a table.
(c) What do the results of part b say about the desirability of this project?
(d) At a discount rate of 5% per year, if all three estimates of annual cost are equally likely, what is the expected benefit/cost ratio?