The government has hired you to advise them on the merits of a project that is being proposed. The project is expected to generate benefits of 14 million dollars today, 5 million dollars in one year from today, and 1 million dollars in two years from today. (These are the only years of concern.) The project costs nothing today, but will cost 20 million dollars in two years. Assume the interest rate is 10%. If the benefit-cost ratio is greater than 1, the project should be allowed. What is your policy suggestion?
What will be an ideal response?
Benefit stream is 5M/1.1 1 + 1M/1.1 2 = 5371900.826. Cost stream is 20M/1.1 2 = 16528925.62.
Therefore, B/C = 5371900.826/16528925.62 >1. Project should be funded.
You might also like to view...
Which of the following would shift the short-run Phillips curve?
a. an negative supply shock b. an increase in inflationary expectations c. a decrease in inflationary expectations d. All of the above.
Institutional barriers that impede human and physical capital investment are known as
A. The discouraged worker gap. B. An illiteracy trap. C. The human capital effect. D. An inequality trap.
Governments create barriers to entry with licenses or other regulations that limit entry.
a. true b. false
As a result of moral hazard
A. both physicians and hospitals order more procedures. B. patients increasingly have to worry about the expense of operations and other medical procedures. C. physicians and hospital administrators have no incentive to raise costs. D. both physicians and hospitals have a financial interest in trying to keep hospital costs down.