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410 resource 2

# 410 resource 2 - high as possible and she can borrow and...

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A state government is considering building a dam to provide water for irrigation. The dam would  cost \$25 million to build which would be paid in five payments of \$5 million each. The first  payment would be made immediately and the remaining payments would come at the end of  each of the next four years. Once constructed, the dam would take a year to fill and would begin  producing benefits at the end of the fifth year. The benefits would be \$3 million per year and  would go on forever. What is the present value of the dam if the interest rate is 5%? Suppose a friend is just about to graduate from college and is thinking of going on to  grad school. She is only interested in making the present value of her income stream as
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Unformatted text preview: high as possible, and she can borrow and lend at an interest rate of 5%. 1. If she doesn’t go to grad school she can earn \$30,000 a year for the next 45 years. What is the present value of this stream of income? (Hint: there's an easier way to compute this than adding up 45 payments.) 2. If she does go to grad school, she has to spend 3 years studying full time (that is, not working) and paying tuition of \$20,000 a year. When she gets out, however, she’ll be able to earn \$40,000 a year for 42 years. What is the present value of this part of the decision? 3. What decision should she make? Would your advice be the same if the interest rate were a lot higher?...
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