Question:
The Island of Kalonia has a budgetary surplus of $150 million. Several proposals have been examined for using the money. Two project proposals emerged as candidates for serious consideration. One of the projects (Project A) uses the entire surplus for countrywide road repairs.The other project (Project B) proposes to invest the entire $150 million in a long neglected hazardous waste cleanup with a project life of 20 years. The project’s annual benefits and maintenance costs are summarized in Table 1. (Note: $150 million is the initial investment that will be spent in year 0).
(a) For each project, set up the annual benefit and cost tables in an Excel spreadsheet.
(b) Calculate the Present Value of Benefit (PVB) and Present Value of Costs (PVC) for each project at discount rates of 5% and 18%.
(c) Use the PVB and PVC obtained from (b) to calculate the Net Present Value (NPV) and Benefit Cost Ratios(BCR) of each project.
(d) Which project is preferred based on your analysis and at what discount rate? Explain the reasons supporting your decision. (hint: use results from c.)
(e) What would happen to your decision if the discount rate was changed to 0% on project B. Explain why and draw a conclusionDownload Attachments:
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