Cost benefit analysis III

Materials for class on Monday, April 2, 2018



Download the slides from today’s lecture.

First slide

Equivalent annual net benefit

In-class small group example

Consider this example:

Answer these questions:

  1. What is the NPV of this project? What is the benefit-cost ratio?

  2. Use an Excel data table and a graph to show the NPV across a range of the following values. At what point does the project break even?
    1. Discount rate
    2. Hours of driving saved
    3. Lives saved
  3. As we’ve talked about in class, the VSL is a statistical estimate of the amount people would be willing to pay to reduce their risk of death by 1%, extrapolated out to 100%.

    Because VSL is an average, it has measures of uncertainty associated with it. According to academic research, there is substantial uncertainty in VSL estimates: in 2008, the NHTSA reported that the 95% confidence interval for VSL ranges from $1,000,000 to $10,000,000, which represents a standard deviation of around $2,000,000. With a $5 million average, the distribution would look something like this:

    Use Monte Carlo simulation in Excel to estimate the NPV over 1,000 trials, varying the VSL with a mean of $5 million and a standard deviation of $2 million. What is the average NPV over all these trials? What is the probability that the NPV is greater than $0? Is this still a good project, given the uncertainty of the VSL?

Feedback for today

Go to this form and answer these three questions (anonymously if you want):

  1. What new thing did you learn today?
  2. What was the most unclear thing about today’s class?
  3. What was the most exciting thing you learned today?