Suppose the State government is deciding which of two education projects to fund: Project A and Project
Question:
Suppose the State government is deciding which of two education projects to fund: Project A and Project B. Each option will provide education for 100 students every year it is in operation, valued at $5 million per year. Project A will cost $20 million to set up, will cost $1 million each year to run and will operate for 20 years. Project B will cost $5 million to set up, $2 million each year to run, and will operate for 15 years.
a) Use a 10% discount rate to calculate the Net Present Value of each of Project A and B to decide which Project the State government should fund.
b) Now use a 5% discount rate to decide which project the government should choose.
c) Describe some characteristics (other than a different discount rate) that might lead to the government always choosing to fund education Project A or B.
Managerial Accounting An Introduction to Concepts Methods and Uses
ISBN: 978-0324639766
10th Edition
Authors: Michael W. Maher, Clyde P. Stickney, Roman L. Weil