The State of RI considers undertaking an infrastructure improvement project (the alternative to this is the status quo-no project) so the decision rule in this case should be based on a positive NPV. This project involves adding an extra lane to I 95 North. The project is considered to have a life span of about 15 years. The project would bring expenses to the state that amount to $15 million. Part of these expenses (80%) accrue to the state in the same year in which the project is implemented (year 0), since these are the costs of constructing the additional lane (labor-wages for construction workers, managers, administrators etc, materials-asphalt mixture, sand, adhesive etc, equipment-rollers, excavator, dump truck etc). The rest 20% of these expenses would occur in the second year (year 1). Furthermore, each year after the first one, for the life of the project the state will incur about $1,500,000 in costs to maintain the lane (e.g. patching, cleaning).

If implemented, the project will bring benefits to the society in terms of travel time savings and human lives saved due to decreased risk of accidents and increased flow of travel. These benefits are calculated to be about $3,350,000 each year and they occur at the end of each year (assume that the first year of the project no benefits will occur due to construction period).

1. (15pts)Compute the Net Present Value (NPV) of this project assuming a discount rate ( r ) of 7.5%. Provide the excel sheet with your calculations and your recommendation for the State.
2. (2pts)What is the IRR for this project? Make a recommendation for the State based on this IRR.
3. (10pts)Perform a partial sensitivity analysis where you show how sensitive your NPV is with respect to the discount rate chosen by using a 2.5% and a 10% rate. Is the project still worth undertaking under either of these new assumptions?