(Advanced) A company releases toxic waste into a lake used for drinking water. 100 years later, a child develops leukemia caused by the contaminated water. (Note that the present discounted value formulas given in the Math Review in your text generalize to the following formula for discounting, where t is the enumber of years in the future and i is the discount rate: Value0 = Valuet / (1+i)t)
a. Suppose the cost of treating the child with leukemia is $100,000, paid as a lump sum 100 years from today. Using a discount rate of 5%, what is the present discounted value of this cost?
b. Suppose the child dies after two years of treatment (i.e. 102 years from today). An estimated value of $1 million is recorded as the "cost" of this death. Still using a discount rate of 5%, what is the present discounted value of this cost?
c. Do you think it makes sense to calculate future "costs of illness" or "costs of death" in this way? What are the problems with applying a discount rate to this kind of calculation?