The management of a university plans to ameliorate the conditions of studying in a certain masters’ degree course. To reach this aim there are two basic different possibilities:

1. Construction of a computer workroom which will be exclusively used by this group of students. The financial details for the computer workroom are as follows: Initial outlay:

€ 100,000, estimated economic life: 10 years, annual maintenance costs: € 1,500.

2. Assignment of personnel to address themselves to the concerns of this group of students.

The annual personnel costs for administration staff would be € 13,300.

For both possibilities it is assumed that more students can be attracted so that the university can make a profit from higher tuition fees of € 14,400 per year. To evaluate investment projects the university uses a discount rate of 6 %.

a) Which of the two possibilities do you prefer according to the net present value method?

Assume that the initial outlay for the computer workroom is paid in two instalments at the beginning and at the end of the first year of use. For convenience we assume that all other payments – if relevant – occur in a single sum at the beginning of the year.

b) Apply the correction method while assuming that the increase in tuition fees is only

€ 13,400 per year. How would your conclusions differ from the answer in subtask a?

c) How would your results differ from subtask b if you cut the discount rate from 6 % to 4 %?