In 1985 it was uncertain whether or not reducing the use of

In 1985, it was uncertain whether or not reducing the use of cholorofluorocarbons (CFCs) would reduce the reduction in the intensity of the ozone layer in the earth\'s atmosphere. Assume at the time it was estimated that there was an 80% chance CFCs were responsible and a 20% chance they were not. The NPV benefit of successfully reducing the ozone layer damage would be $100 billion. The NPV cost of CFC elimination would be $75 billion. Which of the following is true. The expected net benefit of CFC reduction is $25 billion and should proceed. The expected net benefit of CFC reduction is $5 billion and should proceed. The expected net benefit of CFC reduction is -$5 billion and should be rejected. The expected net benefit of CFC reduction is -$50 bilion and should be rejected.

Solution

Option 2.

NPV benefit

100

Expected benefit

80

NPV cost

75

Expected net benefit

5

Since the expected net benefit is 80 percent , 100 bilion would be 80 bilion. Hence 5 bilion(80-75) is the net expected benefit.