Question

1. A town’s recreation department is trying to decide how to use a piece of land. One option is to put up basketball courts with an expected life of 8 years. Another option is to install a swimming pool with an expected life of 24 years. The basketball courts would cost $180,000 to construct, and yield net benefits of $40,000 at the end of each of the 8 years. The swimming pool would cost $2.25 million to construct, and yield net benefits of $170,000 at the end of each of the 24 years. Each project is assumed to have 0 salvage value at the end of its life. Assume that all dollar values are real values (i.e. don’t worry about inflation). Assuming a real discount rate of 4%, which project offers the larger net benefits? a. Generate your answer using the roll-over method. b. Generate your answer using the equivalent annual net benefit (EANB) method. c. Do both methods lead to the same conclusion? d. Repeat exercises a through c using a discount rate of 5%. How does the higher discount rate affect your results? Explain why.

Answer 1

Gfven data 1of Expacted fe au years. Basketball Count EosF-1 %0; 000 Bengyt u01000 Eaeh y og Net Seoimming pool cot $2-25 Yeas cashflous PV factors at PV. -1% 0 000 koro0o -10,000 0.95 uoro0o 38045.24 0.20 o,000 81-83 98 o.86 3u S53.S0 uo,000 0.82 32908.10 4o,000 313u) 05 401000 29gu8 -61 4o,000 27013-S7 4or000 O.67 Net Pv- Basketla -18 528.5(.

Salmming P Pv factor es1 eashlous PV. Yol -2psopoo 2, Soj0oo 101000 92-ob19 140,000 2 3 140000 L6852-37 1398 592 1401000 ,0 .82 33 (9.45 110,000 a.13 126856.62 110,000 110,000 7 8-51801) o.67 tl5062. 67 110,000 0ys33-32 1401000 .6 o43652 10,co0 94 395-48 110,000 13. 94862-36 1701000 So5 15 70,000 SS-198S8 16 10 coo o.us 17 b72218 (70000 0.43 77878 96 o.u 170r000 0-39 70,000 70635 20 o-37 G72 7u:1 o-35 -34 22 1010.20 o-32 23 70,0 58114.48 o3. 120,000 554.12

-aS769 / . NPV C49- 4.999 Basket ba O.013% a o5 105 cOnt O16125 2-225 0.oS nX Cits Pメ 12150.07 7 S29 o-ISUT 40.u7 9569 0 072476 $12 50.07 AN for Basketball $69 ca mming AW of