Exercise 2: Projects with Different Time Length (20 points) i) (15 points) A towns recreation department is trying to decide how to use a piece of land. One option is to put up basketball courts with an expected life of 8 years. Another is to install a swim- ming pool with an expected life of 24 years. The basketball court would cost S180,000 to construct and yield net benefits of $40,000 at the end of each of the 8 years. The swimming pool would cost $2.25 million to construct and yield net benefits of $170,000 at the end of each of the 24 years. Each project is assumed to have zero salvage value at the end of its life. Using a real discount rate of 5 percent, which project offers larger net benefits? Approach the problem using the Rol-over and the Equivalent Annual Net Benefit methods. ii) (5 points) There are two projects under consideration: Project A has an NPV of $47m and will last three years. Project B has an NPV of $58m and will last four years. It is anticipated that if either project is chosen it will be possible to repeat it for the foreseeable future. The interest rate is 13% per year. Calculate which project the company should accept if it decides according to EANB.
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