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what is the answer about this question ? The Kingdom of Hapolonia is considering investing in one of two environmental projects. All benefits and costs
what is the answer about this question ?
The Kingdom of Hapolonia is considering investing in one of two
environmental projects. All benefits and costs associated with each project include all market and
non-market activities to all Hapolonians.
Project A involves spending $30 billion today with benefits of $20 billion one year from now, $10
billion two years from now and $10 billion three years from now.
Project B involves spending $10 billion today, $10 billion one year from now and $10 billion two
years from now with benefits of $10 billion one year from now, $10 billion two years from now
and $20 billion dollars three years from now.
Hapolonians are rather impatient, so an appropriate rate of time preference is five percent. The
Hapolonian economy is a powerhouse and grows consistently at four percent per year. Like most
countries, Hapolonians have an elasticity of the marginal utility of consumption of two percent.
a. (2 marks) Calculate the appropriate social discount rate to use to evaluate the two projects.
b. (2 marks) Calculate the net present value of project A.
c. (2 marks) Calculate the net present value of project B.
d. (2 marks) Using a dynamically efficient approach, briefly explain if either project is justifiable.
(It would be appropriate to define what dynamic efficiency means when trying to explain which
project(s) is (are) justifiable.)
e. (2 marks) Regardless of your answer in part (d), for each of (1) the rate of time preference, (2)
the growth rate of the economy and (3) the elasticity of the marginal utility of consumption,
briefly explain whether an increase or decrease in their values would make the projects more or
less justifiable.
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