05 Jun Question 3. (20 points) Instructor-provided worksheet is reco
Question
3. (20 points) Instructor-provided worksheet is recommended.
New City is considering building a recreation center. The estimated construction cost is $12 million with annual staffing and maintenance costs of $750,000 over the twenty year life of the project. At the end of the life of the project, New City 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) 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 a growth rate of 4 percent, but it could be as low as 1 percent and as high as 6 percent. Analysts estimate the real discount rate for New City to be 6 percent, though they acknowledge that it could be a percentage point higher or lower.
a. Calculate the present value of net benefits for the project using the analysts’ predictions.
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