Cost-Benefit Analysis

“Cost-Benefit Analysis” Please respond to the following:

  • In a heavily debated City Council meeting, one year ago, Cobb County learned that by buying larger garbage trucks it could reduce labor cost for garbage removal. Note: All the dollar amounts below are in this year’s (present) dollars.
  • The cost of the trucks today (one year later) is $400,000.
  • The annual savings in this year’s dollars is $90,000.
  • The trucks will last for four years and then will be sold for $100,000.
  • The city can borrow money at a 7% discount rate to purchase the trucks.
  • Inflation for the next four years is expected to average 3%.
  • Assuming the cost and benefits are incurred at the end of the year, should the city buy the trucks?

Year 0 1 2 3 4 NPV (1)

Solution Preview

Capital project acceptance has always proved very difficult for many firms. A thorough an analysis should, therefore, be done to ensure the project is worth undertaking. Project to be accepted should always experience negative…

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