A county is considering using a piece of park land for one of two alternative re

Question

A county is considering using a piece of park land for one of two alternative recreation projects. Project A would require construction costs of $2 million (year 0) and generate net benefits of $1 million per year for 10 years. (Assume the benefits are realized at the ends of years 1 through 10). Project B would require construction costs of $4 million and generate net benefits of $1 million per year for 20 years. (Assume the benefits are realized at the ends of years 1 through 20). If these figures are in real dollars, and the real discount rate is 7 percent, which project would the county select?

Explanation / Answer

NPV, project A ($ Million) = - 2 + 1 x PVIFA(7%, 10) = - 2 + 1 x 7.0236 = - 2 + 7.0236 = 5.0236

NPV, project B ($ Million) = - 4 + 1 x PVIFA(7%, 20) = - 4 + 1 x 10.594 = - 4 + 10.594 = 6.5940

Since project B has a higher NPV, B should be selected.

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