Reference no: EM133375599
In details, perform a cost-benefit analysis of a funding proposal for the next project and answer the following questions:
Use the net present value methodology when conducting the cost-benefit analysis of the financing proposal.
The National Institutes of Health (NIH) is considering funding a grant for a promising research project that aims to cure a rare disease. The time frame of the research is five years. The grant would fund the hiring of 20 scientists making $150,000 per year for five years, a one-time investment in new lab equipment of $3 million during the first year, and $1 million per year for five years in lab supplies and materials. If successful, the cure would be available upon completion of the project, starting in Year 6.
As the scientist reviewing the proposal for the NIH, you estimate that the probability of success for this project is only 2%. However, if it were successful, it would immediately cure all patients with the disease, which is fatal within one year of diagnosis, and kills approximately 15 people annually.
To answer the following questions, assume the NIH uses a 7% discount rate, and is risk neutral.
Conduct a clear formal cost-benefit analysis for this project, weighing the costs of funding the proposal and the benefits of a possible cure for the disease. Use the figure of $9.6 million for the value of a life.
Do the costs outweigh the benefits? Do you recommend funding the grant? (Note: use a spreadsheet to conduct the cost-benefit analysis. Assume you are conducting these calculations in Year 0, and that funding and project costs would begin in Year 1.)
1. Creates a table for the proposed project including project/program costs and included the effects of future changes in valuation to establish clear comparisons of total project costs and benefits.
2. Calculates the net present value of the project/program.
3. Conduct a formal cost-benefit analysis for this project and make a recommendation.
4. If there is a discount by a certain percentage when conducting a cost-benefit analysis for a project, will this discount be applied for cost only, or cost and benefits, or for benefits only?
5. When we calculate the costs and benefits of the second to fifth years, we cannot set a zero budget for these years, right? Because after the first year, there is a possibility of benefits from the previous year, right?