The City of Evanston wants to add to its high school facilities and is deciding between remodeling the current building or building a new one on the current site. Remodeling the current building would cost $3,000,000 now and last for 20 years. A new building would cost $5,000,000 and last for 70 years. Each building would generate the same $500,000 per year in improved economic outcomes for students (in real terms). For the following, please start discounting after the first year of the program.

a. Calculate the real discount rate, NPV, and expected annual net benefits (EANB) for each option. Which should the town choose?

b. Suppose that inflation is 0.5%. Redo your answer to part b.

c. What is the effect of lower inflation on the respective EANBs? Can you generalize?