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In: Economics

4. The government is contemplating a project that protects a wilderness area. The project’s initial costs...

4. The government is contemplating a project that protects a wilderness area. The project’s initial costs incurred at time t=0 equal $375,000. Starting in year 1, the project is expected to produce annual net benefits of $100,000 into perpetuity.

  1. (a) Calculate the net present value assuming a discount rate of 8%. Do you recommend going forward with this project?

Solutions

Expert Solution

Answer 4(a) : The initial cost of the project at time t is = $375,000

                        The discount rate available means the interest rate that is fixed by the US federal reserve for lending of loans to government or other banking institutions. Therefore, to finance the project, the Government can get the money at an interest rate of 8%

                      This means, the per annum interest amount to be paid by the Government would be at least:                     = 8% of $375,000 + portion of principal amount depending on the number of years the loan has been opted for.

                                  = 8/100 x 375,000

                                  = $30,000 + expected amount of the principal amount.

            Since the Government is expected to get annual net benefits of $100,000 , it is recommended that the Government should go ahead with the project.

Rahul Sunny answered 2 years ago
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