Question

How do you determine whether a new program should be recommended for creation and funding? Do you approve a program with a favorable rate of return and net present value that exceeds the governmental entity’s internal rate of return? Or, do you approve a program that serves the needs of citizens, but may not create the desired rate of return?

Answer 1

For governemnt projects the main aim is public welfare and not profit making. Governments may go for a project which is not profit aking also given it serves a purticular puropse for the public. For. eg. the goverment may make roads and collect toll on that road from vehicles passing. The cost of such a project may be very high but the returns may be very low depending upon the trafic on the roads. But governent has to undertake infrastructure developement work such as building roads even if the IRR and NPV of such projects is lower than the  governmental entity’s IRR