Since the policy will be implemented over time, economists assume that per resident benefits will accrue in increments of $500 (in real terms) at the end of each of the next three years. Find the present value of benefits (PVB) in nominal terms for each resident, assuming an annual inflation rate of 4% and a nominal annual discount rate of 9%.
The Los Angeles area has long been plagued by urban smog. Suppose that one of several ozone-reducing policy options is being evaluated by economists using benefit-cost analysis.
PVB Calculations
Nominal Conversion:
Year 1: 500(1.04) = $520.00
Year 2: 500(1.04)2 = $540.80
Year 3: 500(1.04)3 = $562.43
Inflation Correction:
Year 1: $520.00/(1.09) = $477.06
Year 2: $540.80/(1.09)2 = $455.18
Year 3: $562.43/(1.09)3 = $434.30
PVB = $1366.54
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