The following table gives the estimated costs and benefits of a proposed public convention center.
Table 11-1

-Two mutually exclusive projects,expected to last indefinitely,are being compared.Program A has annual profits and consumer surplus of $10 million and a one-time capital expenditure of $50 million.Program B has consumer surplus of $15 million and a one-time capital expenditure of $100 million.Using net present value as a criterion,which alternative should be selected?

Question

The following table gives the estimated costs and benefits of a proposed public convention center.
Table 11-1
 
-Two mutually exclusive projects,expected to last indefinitely,are being compared.Program A has annual profits and consumer surplus of $10 million and a one-time capital expenditure of $50 million.Program B has consumer surplus of $15 million and a one-time capital expenditure of $100 million.Using net present value as a criterion,which alternative should be selected?

Quizplus · Accepted Answer

If the discount rate is less than 10%, Program B should be selected because its higher consumer surplus outweighs the higher capital expenditure. At a 22% discount rate, neither program should be selected as their net present values would be negative.

The Following Table Gives the Estimated Costs and Benefits of a Proposed