Question

5. Suppose you are tasked with finding the net present value for two projects aimed at reducing traffic congestion. The government will undertake only one project, the project with the highest positive NPV. Assume the discount rate is 3.5%. Project A: involves building a connected series of paths (for biking and walking) throughout the city. The paths are expected to last about 10 years. The paths cost S350,000 to construct at t-0, and yield net (of operating costs) benefits of $50,000 at the end of each of the 10 years. Project B: involves adding two new bus routes. The bus project has an expected lifespan of about 5 years. The project's start-up costs of S350,000 occur at t-0. Then project is expected to yield net (of operating costs) benefits of $85,000 at the end of each of the 5 years. (a) Calculate the net present value for each project as described above and illustrate using a separate timeline for each project. Which project would you recommend based on this analysis? (b) The two projects do not have the same time frame. How would you take this into account? And how does it affect your recommendation on which project to proceed with?

Answer 1

(a)

	Project A					Project B
	Rate =	3.50%				Rate =	3.50%
	Years	Cashflow				Years	Cashflow
	1	-350000				1	-350000
	2	50000				2	85000
	3	50000				3	85000
	4	50000				4	85000
	5	50000				5	85000
	6	50000
	7	50000				NPV =	-10080.1
	8	50000
	9	50000
	10	50000
		NPV =	99788

So, government should choose Project A with positive and higher net present value.

(b) Because of the change in time frame, we calculated the net worth of project in today's worth. If its present value is higher the that project would be more beneficial and should be selected.