Question 2: Evaluation of Public Expenditure The government has to choose between two different projects: 1. Project 1 is organized in six years; the flows happen at the end of each period. It costs 100000,  incurring immediately, and yields a return of 50000 for the first three years; in the fourth year, it  yields a return of 50000, but the government has to sustain a cost of 20000 in order to make some  necessary innovations to the structure of the plan; in the fifth year, it is able to generate a positive  return of 60000, while in the last year the revenue is of 50000, but there is a cost of 10000 to close  the project. The government assumes that, for the first four years, the discount rate should be 10%,  while it is more appropriate to consider a discount rate of 15% in the last two years.  2. Project 2 is organized in four years; the flows happen at the beginning of each period. It costs  50000, incurring immediately, and yields a return of 35000 for the first three years; in the fourth  year, it yields a return of 40000, but the government has to sustain a cost of 20000 in order to close  the project. The government assumes that it is safe to consider a constant discount rate of 5% for the  entire duration of the project. Using the two tables below, please evaluate these two projects and determine if they are acceptable  or not. Second, find which is the best one, according to the Present Discounting Value approach (cost-benefit analysis). Finally, consider that the benefits and the costs of the chosen project, according to the government's  decisions, are not equally redistributed among societal groups: indeed, the two third of the benefits  are given to the poorest group of the society, while the two thirds of the costs are sustained by the  richest group; discuss in which conditions the government should either accept or reject the project. Project 1   Benefits (returns) Costs Profits Discount Rate Present discounting value 0           1           2           3           4           5           6           Total           Project 2    Benefits (returns) Costs Profits Discount rate Present discounting value 0           1           2           3           4           Total

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Question 2: Evaluation of Public Expenditure

The government has to choose between two different projects:
1. Project 1 is organized in six years; the flows happen at the end of each period. It costs 100000, 
incurring immediately, and yields a return of 50000 for the first three years; in the fourth year, it 
yields a return of 50000, but the government has to sustain a cost of 20000 in order to make some 
necessary innovations to the structure of the plan; in the fifth year, it is able to generate a positive 
return of 60000, while in the last year the revenue is of 50000, but there is a cost of 10000 to close 
the project. The government assumes that, for the first four years, the discount rate should be 10%, 
while it is more appropriate to consider a discount rate of 15% in the last two years. 

2. Project 2 is organized in four years; the flows happen at the beginning of each period. It costs 
50000, incurring immediately, and yields a return of 35000 for the first three years; in the fourth 
year, it yields a return of 40000, but the government has to sustain a cost of 20000 in order to close 
the project. The government assumes that it is safe to consider a constant discount rate of 5% for the 
entire duration of the project.

Using the two tables below, please evaluate these two projects and determine if they are acceptable 
or not.

Second, find which is the best one, according to the Present Discounting Value approach (cost-benefit analysis).

Finally, consider that the benefits and the costs of the chosen project, according to the government's 
decisions, are not equally redistributed among societal groups: indeed, the two third of the benefits 
are given to the poorest group of the society, while the two thirds of the costs are sustained by the 
richest group; discuss in which conditions the government should either accept or reject the project.

Project 1

  Benefits (returns) Costs Profits Discount Rate Present discounting value
0          
1          
2          
3          
4          
5          
6          
Total          

Project 2 

  Benefits (returns) Costs Profits Discount rate Present discounting value
0          
1          
2          
3          
4          
Total          

 

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