Question 3: Net Present Value (3 points total)

The city of Corvallis is deciding whether or not to undertake a project to improve the quality ofthe citys drinking water. The project would require an immediate payment of $20,000 toinstall a new filtration system. This filtration system will require yearly maintenance costs of$1,000 after the initial period. The filtration system will be operational for 5 years. The benefits in first year are $500. At the end of year 2, the benefit received is $4000. For years 3, 4,and 5, the benefit received is $7,000. Assume that the discount rate is 6%.

a. Write out the general mathematical formula you would use to determine thenet present value (NPV) of this project. (1 point)

b. Plug-in the appropriate numbers into the formula from above. You DO NOTneed to calculate the answer, simply plug in the values in the appropriateplaces. (1 point)

c. After calculating the NPV, what criteria should the city use to decide if theyshould install the filtration system or not? (1 point)