Suppose the government can pursue up to three projects.The first has benefits of $300 and costs of $270; the second has benefits of $580 and costs of $460; the third has benefits of $90 and costs of $80.Suppose that it costs $0.15 for the government to raise $1 in revenues.Which project should the government pursue?

Question

Quizplus · Accepted Answer

To determine which project the government should pursue, we need to calculate the net present value (NPV) of each project. The NPV formula is:

NPV = Benefits / (1 + r)^n - Costs

where r is the discount rate (which is 15% or 0.15 in this case) and n is the number of years.

For the first project, NPV = 300 / (1.15)^1 - 270 / (1.15)^1 = $17.39
For the second project, NPV = 580 / (1.15)^1 - 460 / (1.15)^1 = $52.17
For the third project, NPV = 90 / (1.15)^1 - 80 / (1.15)^1 = $4.35

Therefore, the second project has the highest NPV and should be pursued by the government.

Suppose the Government Can Pursue Up to Three Projects