1. Consider two public projects that will generate public benefits in the future:

Project A will require an upfront investment cost of $1 million dollars, but it will generate $2 million in benefits 5 years in the future.

Project B will require an upfront investment cost of $1 million dollars, but it will generate $2 million in benefits starting 50 years in the future.

{Assume there is zero inflation, and that no other 'reinvestment' opportunities exist}

a.Using a zero social discount rate, which project is preferred?

b.Which project would be preferred using any positive discount rate?

c.Assume you are 15 years old, and you have a trust fund (perpetuity paying $10,000/year forever) that will begin making annual payments when you are 21. What is the present value of that trust fund today if the discount rate is 4%? (Hint: two steps, one computing the PV of the perpetuity 6 years from now, and then discounting that PV to the present).

d.Consider the two project below with benefits in the years indicated (a negative benefit is a cost)(amounts are in millions of real dollars):

Year 0102030

Project A- 6+10+5

Project B-6+5+5+10

Which project has the highest PV with a 3% discount rate? What about at 6%?