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16. A project yields an annual benefit of $250/year for ever. If the rate of return...

16. A project yields an annual benefit of $250/year for ever. If the rate of return is 8%, what is the present value? If it costs $5000 should you proceed? If it were a public project how might your answer change?

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Answer #1

Annual Project Yield = $ 250, Rate of Return = 8 %

Therefore, Present Valu (PV) = Annual Project Yield / Rate of Return = 250 / 0.08 = $ 3125

The project should be taken up only when its PV is greater than its cost. Since the cost of $ 5000 is greater than the PV one should not proceed with the same as it does not lead to economic benefits. However, if the project is a public one then the project can be taken up for public good even if it does not provide economic benefit.

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