What is cost-benefit analysis? What are the main steps in conducting cost-benefit analysis?
A city has learned that by buying larger garbage trucks, it could reduce labor costs for garbage removal.
Note: All the dollar amounts below are in this year’s dollars (constant dollars).
Cost of the trucks today is $400,000.
Annual savings in this year’s constant dollars is $90,000.
Trucks will last for 4 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 4 years) is expected to average 3%.
Assuming the costs and benefits are incurred at the end of the year, should the city buy the trucks?