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Question 1-part b) The town of Springfield, current population 2000, recently suffered a fire that destroyed its Civic Center Building, a facility

Question 1-part b)

The town of Springfield, current population 2000, recently suffered a fire that destroyed its Civic
Center Building, a facility that provided all sorts of services to the community. The question is
whether, and on what terms, to rebuild it. The real interest rate is 3%, and it is known that the
average citizen derives benefits from the civic center that are worth $150 a year to each of them.
Architects have provided plans for two versions of a rebuilt Civic Center, each of which will yield
these same benefits over its lifespan, but with different lifespans and different costs, which are
shown in the table below:

Version A Version B
Time for construction 1 year 2 years
Cost of construction $4000 $8000
Cost of operation $1000/year $2000/year
Expected lifespan 12 years 18 years

As you can see, Version A is cheaper to build and to operate, but it falls apart 10 years after
construction is completed. Version B takes longer to build, costs more, and lasts more.

b. Assuming that, for both versions, costs of construction are borne all at once as construction
begins, what are the net present values of the two versions? .

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