1. The city you work for is considering installing a pond with a fountain that will add beauty to the community and also reduce the probability of flood waters getting into local residences and businesses. The pond with fountain will cost $10 million to install and $10,000 a year for maintenance. Fortunately, with proper maintenance the pond and fountain are expected to last forever. For each of the 1,000 large businesses in the area the expected value of the flood reductions will be approximately $25 per year. About 100,000 residents will each benefit from the beauty and reduced likelihood of flooding by approximately $10 each per year. The interest rate is 10%.

1. What is the approximate present value of the projects costs? What is the approximate present value of the projects benefits? What is the approximate net present value of the project based on the data you have? Is the project admissible?
2. Suppose the maintenance cost estimates and benefit estimates were in current dollars and the interest rate of 10% was in nominal terms. Your analysis suggests expected inflation is 6%. How would your estimates of the approximate present value of the projects costs, benefits, and net present value change?
3. If the pond and fountain would only last for three years even with the maintenance, what would be the approximate present value of the projects costs? Assume the discount rate is 10%.
4. There is another project that would provide a net benefit of $20 each to a different group of 200,000 people immediately, but is unlikely to be provided in the absence of government intervention. Unfortunately, due to insufficient budget and political will you can only do one of the projects. Comparing the project described in A) and this project, in the absence of any other information about the people involved, which project should be preferred and why?
5. What "distributional weight" would make you indifferent between the original project in part A) and the alternative project in D).