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A government department is trying to decide how to use a piece of land. One option is to build a community garden with an expected life of four years. Another is to build an education center with an expected life of 12 years. The community garden would cost $100,000 initially and yield net benefits of $40,000 at the end of each of the four years, starting from year one. The education center would cost $2 million to construct and yield net benefits of $270,000 at the end of each year, starting from year three. Each project is assumed to have zero salvage value at the end of its life. Using a real discount rate of 5 percent, which project should be recommended?

A government department is trying to decide how to use a piece of land. One option is to build a community garden with an expected life of four years. Another is to build an education center with an expected life of 12 years. The community garden would cost $100,000 initially and yield net benefits of $40,000 at the end of each of the four years, starting from year one. The education center would cost $2 million to construct and yield net benefits of $270,000 at the end of each year, starting from year three. Each project is assumed to have zero salvage value at the end of its life. Using a real discount rate of 5 percent, which project should be recommended?

Understanding Business
Understanding Business
12th Edition
ISBN:9781259929434
Author:William Nickels
Publisher:William Nickels
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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A government department is trying to decide how to use a piece of land. One option is to build a community garden with an expected life of four years. Another is to build an education center with an expected life of 12 years. The community garden would cost $100,000 initially and yield net benefits of $40,000 at the end of each of the four years, starting from year one. The education center would cost $2 million to construct and yield net benefits of $270,000 at the end of each year, starting from year three. Each project is assumed to have zero salvage value at the end of its life. Using a real discount rate of 5 percent, which project should be recommended?
Transcribed Image Text:A government department is trying to decide how to use a piece of land. One option is to build a community garden with an expected life of four years. Another is to build an education center with an expected life of 12 years. The community garden would cost $100,000 initially and yield net benefits of $40,000 at the end of each of the four years, starting from year one. The education center would cost $2 million to construct and yield net benefits of $270,000 at the end of each year, starting from year three. Each project is assumed to have zero salvage value at the end of its life. Using a real discount rate of 5 percent, which project should be recommended?
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