Question 2: Evaluation of Public Expenditure The government has to choose between two different projects: 1. Project 1 is organized in six years; the flows happen at the end of each period. It costs 100000, incurring immediately, and yields a return of 50000 for the first three years; in the fourth year, it yields a return of 50000, but the government has to sustain a cost of 20000 in order to make some necessary innovations to the structure of the plan; in the fifth year, it is able to generate a positive return of 60000, while in the last year the revenue is of 50000, but there is a cost of 10000 to close the project. The government assumes that, for the first four years, the discount rate should be 10%, while it is more appropriate to consider a discount rate of 15% in the last two years. 2. Project 2 is organized in four years; the flows happen at the beginning of each period. It costs 50000, incurring immediately, and yields a return of 35000 for the first three years; in the fourth year, it yields a return of 40000, but the government has to sustain a cost of 20000 in order to close the project. The government assumes that it is safe to consider a constant discount rate of 5% for the entire duration of the project. Using the two tables below, please evaluate these two projects and determine if they are acceptable or not. Second, find which is the best one, according to the Present Discounting Value approach (cost-benefit analysis). Finally, consider that the benefits and the costs of the chosen project, according to the government's decisions, are not equally redistributed among societal groups: indeed, the two third of the benefits are given to the poorest group of the society, while the two thirds of the costs are sustained by the richest group; discuss in which conditions the government should either accept or reject the project. Project 1 Benefits (returns) Costs Profits Discount Rate Present discounting value 0 1 2 3 4 5 6 Total Project 2 Benefits (returns) Costs Profits Discount rate Present discounting value 0 1 2 3 4 Total
Question 2: Evaluation of Public Expenditure
The government has to choose between two different projects:
1. Project 1 is organized in six years; the flows happen at the end of each period. It costs 100000,
incurring immediately, and yields a return of 50000 for the first three years; in the fourth year, it
yields a return of 50000, but the government has to sustain a cost of 20000 in order to make some
necessary innovations to the structure of the plan; in the fifth year, it is able to generate a positive
return of 60000, while in the last year the revenue is of 50000, but there is a cost of 10000 to close
the project. The government assumes that, for the first four years, the discount rate should be 10%,
while it is more appropriate to consider a discount rate of 15% in the last two years.
2. Project 2 is organized in four years; the flows happen at the beginning of each period. It costs
50000, incurring immediately, and yields a return of 35000 for the first three years; in the fourth
year, it yields a return of 40000, but the government has to sustain a cost of 20000 in order to close
the project. The government assumes that it is safe to consider a constant discount rate of 5% for the
entire duration of the project.
Using the two tables below, please evaluate these two projects and determine if they are acceptable
or not.
Second, find which is the best one, according to the Present Discounting Value approach (cost-benefit analysis).
Finally, consider that the benefits and the costs of the chosen project, according to the government's
decisions, are not equally redistributed among societal groups: indeed, the two third of the benefits
are given to the poorest group of the society, while the two thirds of the costs are sustained by the
richest group; discuss in which conditions the government should either accept or reject the project.
Project 1
| Benefits (returns) | Costs | Profits | Discount Rate | Present discounting value | |
| 0 | |||||
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 5 | |||||
| 6 | |||||
| Total |
Project 2
| Benefits (returns) | Costs | Profits | Discount rate | Present discounting value | |
| 0 | |||||
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| Total |
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