The state of Glottamora has $100 million remaining in its budget for the current year. One alternative is to give Glottamorans a one-time tax rebate. Alternatively, two proposals have been made for state expenditures of these funds.
The first proposed project is to invest in a new power plant, costing $100 million and having an expected useful life of 20 years. Projected benefits accruing from this project are as follows:
YEARS
|
BENEFITS PER YEAR ($ MILLIONS)
|
1-5
|
$0
|
6-20
|
20
|
The second alternative is to undertake a job retraining program, also costing $100 million and generating the following benefits:
YEARS
|
BENEFITS PER YEAR ($ MILLIONS)
|
1-5
|
$20
|
6-10
|
14
|
11-20
|
4
|
The state Power Department argues that a 5 percent discount factor should be used in evaluating the projects, because that is the government's borrowing rate. The Human Resources Department suggests using a 12 percent rate, because that more nearly equals society's true opportunity rate.
What rate do you believe to be more appropriate?