Reference no: EM132645843
Binghamton University is building a recreation center. The estimated construction cost is $12 million with annual staffing and maintenance costs of $750,000 over the 20-year life of the project (ie, t = 0, 1, 2, ..., 19). At the end of the life of the project (ie, at t = 19), Binghamton expects to be able to sell the land for $4 million, though the amount could be as low as $2 million and as high as $5 million. Analysts estimate the first-year benefits (accruing at the end of the year of the first year, ie at t =1) to be $1.2 million. They expect the annual benefit to grow in real terms due to increases in population and income. Their prediction is an annual growth rate of 4 percent, but it could be as low as 1 percent or as high as 6 percent. Analysts also estimate the real discount rate for Binghamton to be 6 percent per year, though it could be a percentage point lower or higher.
1. Calculate the present value of net benefits for this project using the analysts' predictions.
2. Investigate the sensitivity of the present value of net benefits to alternative projections within the ranges given by the analysts. Change only one assumption at a time, and try all possible combinations of assumptions (there are 27 possible combinations).
3. Based on your analysis on parts 1 and 2 of this problem, do you think Binghamton University should build the recreation center?
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