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Question: Net Present Value
The city of Corvallis is deciding whether or not to undertake a project to improve the quality ofthe city's drinking water. The project would require an immediate payment of $20,000 toinstall a new filtration system. This filtration system will require yearly maintenance costs of$1,000 after the initial period. The filtration system will be operational for 5 years. The benefits in first year are $500. At the end of year 2, the benefit received is $4000. For years 3, 4,and 5, the benefit received is $7,000. Assume that the discount rate is 6%.
a. Write out the general mathematical formula you would use to determine the net present value (NPV) of this project.
b. Plug-in the appropriate numbers into the formula from above. You DO NOT need to calculate the answer, simply plug in the values in the appropriateplaces.
c. After calculating the NPV, what criteria should the city use to decide if theyshould install the filtration system or not?
Give your opinion of two currently used policy prescriptions, using international relations paradigms, which you believe will impact the U.S. domestic policy over the next two years. Justify your response.
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Suppose a third project will cost $20,000 today and yield a return of $2,500 a year indefinitely. What is the present value of the project? What is the present value if the interest rate increases to 20 percent?
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The following equation represents the weekly demand that a local theater faces. Qd = 2000 - 25 P + 2 A, where P represents price and A is the number of weekly advertisements. Presently the theater advertises 125 times per week.
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