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

  • From Business: Finance
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  • Due on Jul. 02, 2012
  • Asked on Jul. 02, 2012 at 10:59:46AM
Asked by :
betterthanbrb
 
 
Q:
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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adamlg
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A:
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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NET PRESENT VALUE
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  • Posted on Jul 02, 2012 at 12:16:16PM
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nicky9688
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Preview: ... 723 (Locate 5% on the attached table of NPV and add the value of the first three years to get 2.723 factor). Multiply it by $35 million = $95.31 million.  Inital outlay is $100 million. Deduct $95.31 million from $100 million, we get $4.69 million which is negative discounted cashflow.   Net present value of second project at 5%.  Refer the present value table (attached) for three ye ...
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NPV TABLE.pdf.docx (20K)