The State of Glottamora has $100 million remaining in the budget for the curre

    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?

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