Question 1

Bridgwater community wants to build a multipurpose family center. Estimated costs for construction is $6.5 million. Staffing and maintenance costs are expected to be $500,000 annually over the twenty year life of the project. Bridgwater expects to be able to sell the land for $5 million at the end of the project life, though the amount could be as low as $3 million and as high as $7 million. An economist in the community estimates the first year benefits (accruing at the end of the first year) to be $1 million. She expects the annual benefit to grow in real terms due to increases in population and income. The prediction is a growth rate of 4 percent, but it could be as low as 2 percent and as high as 5 percent. She also estimates the real discount rate for Bridgwater to be 8 percent, though it could be a percentage point higher or lower.

a.

Calculate the present value of net benefits for the project using the analysts worse case, expected case and best case predictions.

b.

Implement a Monte Carlo analysis of the present value of net benefits of the program.