The State of Glottamora has $100 million remaining in the budget for the current year.
One alternative is to give Glottamora a one-time tax rebate. Alternatively two proposals have been made for state expenditures of these funds.
The first proposal project is to invest in a new power plant costing $100 million and have an expected useful life of 20 years. Projected benefits accruing
from this project are as follows:
years
Benefits per year
($ millions)
1-5
$0
6-20
20
The second alternative is to undertake a job retraining program also costing $100 million and generating the following benefits:
years
Benefits per year
($ millions)
1-5
$20
6-10
14
11-20
4
The state Power Department argues that a 5 percent discount factor should be used in evaluating the projects because that is the government%u2019s borrowing
rate. The Human Resources Department suggests using a 12 percent rate because that more nearly equals society%u2019s true opportunity rate.
C. What rate do you believe to be more appropriate?