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# \$10.00You are planning to build a new low-inco

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• Due on Jul. 02, 2012
• Asked on Jul. 02, 2012 at 10:59:46AM

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You are planning to build a new low-income housing development and must choose one of two projects. With a discount rate of 5% which should you choose: Project 1, with a one-time initial cost of \$100 million and 3 years of societal benefits at \$35 million annually. Project 2, with a one-time initial cost of \$80 million and 3 years of societal benefits at \$30 million annually. Describe what happens both mathematically and intuitively when the discount rate is increased. What happens when the discount rate is decreased?

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• Posted on Jul. 02, 2012 at 11:44:44AM
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Preview: ... the net present value (NPV) of each option.  For option 1, you spend 100 million during year 0 and get 35 million in benefits every year.  Those future benefits need to be discounted using a 5% rate, so we divide each year's benefits by 1.05 for each year in the future.  So the first year is divided by 1.05, the second year is ...

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• Posted on Jul 02, 2012 at 12:16:16PM
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