Exercise 2: Long Term Discounting

Assume a project will result in benefits of $10 million dollars each year in perpetuity.

(a) Compute the present value of these benefits using a time-constant discount rate of 3%.

(b) Compute the present value of these benefits using the following time-declining discount rate schedule: 4 percent for years 1-50; 3 percent for years, 51-100; 2 percent for years 101-200; 1 percent for years 201-300; and 0.5 percent thereafter.

(c) Between which values should the discount rate in part (a) fall in order for both NPV (in (a) and (b) ) to not be more than a 10% apart from each other.