Thanks for your help. A school is reviewing its research program. The program re

Question

Thanks for your help.

A school is reviewing its research program. The program requires $30K to run next year in State A or $16K in State B (50% chance either state occurs). The Government will offer $5000 is State A occurs. Without the offer, the project's cash flows can be discounted at 15%, while the risk free rate is 8%.

a) Calculate present value of the program cost without considering the government subsidy.

b) Calculate present value of the program cost with the government subsidy.

c) Calculate present value of government subsidy.

d) If the current budget for the program is $18K, should the school go forward with the research program?

e) What should the risk-adjusted discount rate be for the project with the Governmet subsidy?

Explanation / Answer

a. PV=( 30000x.5+16000x.5)/1.15= 20000

b.PV=( 30000x.5+16000x.5)/1.15-(5000/1.08)

c. 5000/1.08

d. yes since NPV is posotive(20000-18000=$2000)

e. 15-8=7%

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