Question

A government is considering paving a highway with a newly developed "wear-proof" material. Paving the highway would cost $4 billion today, but it would save $400 million in maintenance costs for each of the next 10 years. Use the concept of present value to determine whether the project is worth undertaking if the government can borrow at an interest rate of 4%. Is it worth it if the interest rate is 0%? 8%?

Answer 1

Step-by-step explanation:

Hence, the Net Present Value (NPV) is at rates of 4 percent and 8 percent is negative, the govt should not accept/recognize the project at mentioned rates. In addition to this, undertaking the project at 0 percent would not result in any benefit nor would it cause any damages, so there would be no reasons to accept the project at these rate.

The interest rate supports to find today's value of money that one is going to get in future. NPV aids to determine the real benefits that can be recived by investing in a project. However, the NPV is inversely related to the interest rate; so, interest rate is critical in finding whether the project should be accepted or not.