San Francisco is building a library combined with an upper floor offering affordable senior housing. The estimated construction cost is $15 million, with annual labor and maintenance costs of $600,000 over the twenty-year time horizon of the project. At the end of that time, San Francisco plans to sell the entire complex for $10 million, although the amount could be as low as $6 million and as high as $15 million. (This is salvage or scrap value.) You estimate the first year benefits to the city (accruing at the end of the year of the first year) to be $1.2 million. You also expect the annual benefit to grow in real terms due to increases in population and income. Your agency prediction is a growth rate of 4 percent, but it could be as low as 1 percent and as high as 6 percent. The real discount rate for the city of San Francisco is 5 percent, but if there is a change it could change immediately to be a percentage point higher or lower.

a. Calculate the present value of net benefits for the project using your predictions.

b. Find the sensitivity of the present value of net benefits to alternative predictions about the scrap value.