State representative James Smith has proposed a new state supported convention facility in the state's capitol. The convention facility would provide the state with $400,000 in net cash flow lease receipts) and would cost $3,000,000. The state Planning Department normally uses a 9% discount rate when evaluating capital projects. If the project has a 15 year life, the state should accept the proposal.

Question

Quizplus · Accepted Answer

To evaluate the project, we need to calculate the net present value (NPV) of the cash flow. Using a discount rate of 9%, the NPV of the project is:
NPV = -$3,000,000 + ($400,000/0.09)*(1 - 1/1.09^15) = $239,081.20
Since the NPV is positive, the project is expected to generate more cash flow than it costs, and therefore the state should accept the proposal.

State Representative James Smith Has Proposed a New State Supported