1. A proposed project should be accepted if the net present value is
a. positive.
b. negative.
c. larger than the rate of interest.
d. smaller than the rate of interest.
2. If an analyst predicts that the benefits of a two-year project would be $100,000 in the middle of the first year and $110,000 in the middle of the second year, the scrap value at the end of the project's life is expected to be $20,000 upon resale, and the discount rate is 5%, how much is the present value of total benefits for the project?
a. $217,968
b. $213,152
c. $230,000
d. $219,827
3. The use of sensitivity analysis will generally result in
a. the calculation of an exact NPV.
b. the calculation of a best case, a base case and a worst case.
c. the calculation of the probability of project success.
d. the calculation of the probability of the maximum net benefit.
4. A county would like to estimate the net benefits of a park to its users. The current manager of the park estimates the maintenance cost of the park to be $90,000 per year. An analyst estimated that the park would generate $120,000 per year in benefits to its visitors. Assuming that the yearly benefits, which are measured in real dollars, accrue at the end of each of the 15 years, the maintenance cost is the only cost at the end of each year of the 15 years and that the appropriate real discount rate is 4 percent, calculate the net benefits of park. (Hint: You can use the formula for the present value of an annuity).
a. $450,000
b. $333,551
c. $1,284,206
d. $1,244,206
5. The mayor must spend $10 million today on a project that is expected to bring in annual benefits of $1.5 million for the next 10 years (beginning at the end of year 1). If the discount rate is 5%, what is the NPV of this project?
a. $2.44 million
b. $5 million
c. $1.68 million
d. $1.58 million
6. The mayor must spend $10 million today on a project that is expected to bring in annual benefits of $1.5 million for the next 10 years (beginning at the end of year 1). If the discount rate is 10%, what is the NPV of this project?
a. $0.27 million
b. -$0.78 million
c. -$0.98 million
d. -$1.24 million
7. A county is considering using a piece of park land for one of two alternative recreation projects. Project A would require construction costs of $2 million (year 0) and generate net benefits of $1 million per year for 10 years. (Assume the benefits are realized at the ends of years 1 through 10). Project B would require construction costs of $4 million and generate net benefits of $1 million per year for 20 years. (Assume the benefits are realized at the ends of years 1 through 20). If these figures are in real dollars, and the real discount rate is 8 percent, which project would the county select?
8. Ecological scientists suggest the closing of a national marine park for one year for restoration purposes. It is owned by the county, which allows free access to visitors. However, a parking fee of $10 per vehicle is required to enter the park. You are involved in estimating the economic losses to local businesses and are asked to find tourists' welfare loss as a result of this plan. Almost all visitors to the national marine park are families on a vehicle who come from the towns up to 100 miles from the park. Visitors are allocated to a particular zone, depending on their distance to the park. Zones are easily formed by drawing concentric rings around the site on a map.
9. An analyst for the county has collected data for a travel cost study to estimate the benefits of the national park. Visitors were asked to log in as they enter the national park and fill out an information form. He also observed a sample of visitors from which he estimated that each family who visited the site is composed of 4 individuals with 2 adults, on average. The following table summarizes the data he collected:
|
Zone
|
Round-trip Travel Time (Hours)
|
Miles from the park
|
Total Number Visitors
|
|
Zone 1
|
1
|
22
|
33,000
|
|
Zone 2
|
2
|
45
|
27,000
|
|
Zone 3
|
3
|
70
|
19,000
|
|
Zone 4
|
4
|
100
|
13,000
|
In order to translate the distance traveled into an estimate of the cost visitors faced in using the park, the analyst made the following assumptions. First, the average operating cost of vehicles is $0.52 per mile. Second, the opportunity cost to adults of travel time is 40 percent of their wage rate; it is zero for children. Fourth, adult visitors have the average county wage rate of $10 per hour.
a. Using the preceding information, calculate the travel cost per person from each zone
b. Calculate the value of the national marine park for each zone and the overall value for the amenity (the annual welfare loss to tourists when the national park is closed).