“Cost-Benefit Analysis”

• 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)