**QUESTION**

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5. Suppose your municipality is trying to determine how to deal with pesticide contamination of its water supply. It wants to undertake a B-C (Benefit - Cost) analysis of two alternate policy options for controlling pesticides. The municipality has hired you to provide a recommendation. The two alternatives for consideration are: (a) Upgrading its municipal water treatment plant to remove the pesticides. Or, (b) Banning the use of the pesticide in the metropolitan area. Assume that the present value benefit from water treatment at the end of $\mathbf{1 0}$ years is $\mathbf{\$ 4 0}$ million. Also, assume that either technique reduces the pesticide to a level that does not adversely affect human health. The costs of these control options are as follows: Municipal treatment upgrades: Capital Cost $=\mathbf{\$ 2 0}$ million. The new plant is constructed over the course of the initial year (year 0). It starts operating at the end of the initial year. Once operational, it has operating cost of $\$ 1$ million per year. Once constructed the plant lasts for 5 years, then must be replaced with a new plant (i.e., incur capital costs again). Pesticide Ban: There are no capital costs. The annual operating costs due to substitution of non-toxic methods of controlling pests is $\mathbf{\$ 3 . 5}$ million each year. Assume a discount rate of $5 \%$ and the planning horizon to be 10 years (year 0 is the beginning year and year 9 will be the $10^{\text {th }}$ year). Calculate the PVC (Present Value Cost), PVB (Present Value Benefit), the NPV (Net Present Value), and the B-C (Benefit - Cost) ratio for each project. Which project would you recommend? Explain why? (15 marks)