In a recent benefit-cost analysis of a proposed regulation that generated positive net benefits in the present but negative net benefits in the future, the government used a 5% social discount rate. If it had instead used a 7% social discount rate, the net present value of the policy would have been ; if it had used a 10% social discount rate, the net present value would have been .

A) Lower; lower

Explanation:

Here are the options of this question :

A) Lower; lower B) Lower; higher C) Higher; lower D) Higher; higher

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

The lower the the discount rate, the higher the NPV and the discount the interest rate, the lower the NPV

7% and 10% are both higher than 5% so NPV would be lower in both instances

Let us USE an example

Cash flow in year 0 = $-10,000

Cash flow in year 1 and 2 = 100,000

NPV when discount rate is 5% = $262,324.48

NPV when discount rate is 7% = $252431.60

NPV when discount rate is 10% = $238,685.20

We can see NPV was highest when discount rate is 5%

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute