Suppose the State government is considering two alternative projects: Option A - An affordable housing scheme utilising land that the government already owns worth $12.5 million dollars. On the land the government can build a block of units for $7.5 million dollars. The project yields a benefit of $2.2 million dollars per year with an ongoing cost of $1 million dollars per year. The project lasts for 16 years. Option B - A large scale solar farm which will cost $90 million dollars. There is an annual ongoing cost of $2 million dollars and a yearly benefit of $9 million. The project lasts for 24 years. Assume sunk costs are not counted towards the NPV of the project. a) Provide a comparison of the two projects using the roll over method. Use a 5% discount rate. Based on this comparison Option should be selected. This project has a roll over net present value of $ million. b) Calculate the equivalent annual net benefit. EANB Option A = $ million ENAB Option B = $ million c) Does your answer to part b) confirm your result from part a) (yes/ 截图(Alt + A) a detailed explanation in your spreadsheet. Note: give all answers to two decimal places where appropriate.

Suppose the State government is considering two alternative projects: Option A - An affordable housing scheme utilising land that the government already owns worth $12.5 million dollars. On the land the government can build a block of units for $7.5 million dollars. The project yields a benefit of $2.2 million dollars per year with an ongoing cost of $1 million dollars per year. The project lasts for 16 years. Option B - A large scale solar farm which will cost $90 million dollars. There is an annual ongoing cost of $2 million dollars and a yearly benefit of $9 million. The project lasts for 24 years. Assume sunk costs are not counted towards the NPV of the project. a) Provide a comparison of the two projects using the roll over method. Use a 5% discount rate. Based on this comparison Option should be selected. This project has a roll over net present value of $ million. b) Calculate the equivalent annual net benefit. EANB Option A = $ million ENAB Option B = $ million c) Does your answer to part b) confirm your result from part a) (yes/ 截图(Alt + A) a detailed explanation in your spreadsheet. Note: give all answers to two decimal places where appropriate.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 1P

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