Question

16. A county is considering using a piece of park land for one of two alternative projects. Project A would require construction costs of $180,000 (year 0) and generate net benefits of $35,000 per year for 8 years. (The benefits are realized at the ends of years 1 through 8). Project B would require construction costs of $2.25 million and generate net benefits of $150,000 per year for 24 years. (The benefits are realized at the ends of years 1 through 24). Each project is assumed to have zero salvage value at the end of its life.  If these figures are in real dollars, and the real discount rate is 6 percent, which project would the county select? Show your calculations - you can upload your Excel calculations. (You will have to calculate the NPV of each project then use the EANB or Roll-over method to compare the two projects of different life spans).

Answer 1

Project A has a useful life of 8 years while B has 24 years. In order to conduct NPW analysis we have to compare the two for a common analysis period. Take LCM of 8 and 24 we get 24 years. Thus, the two projects must be evaluated for a period of 24 years.

Now, calculating the NPW of project B

Net present worth of project B = - $ 367,446.37

Solved it using excel too. I am attaching the screenshot of the same. Kindly refer the attached screenshot.

On the basis of net present worth analysis we can conclude that project A must be selected.