Question: A town's 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 eight years. Another is to install a swimming pool with an expected life of 24 years. The basketball courts

would cost $200,000 to construct and yield net benefits of $45,000 at the end of each

of the eight years. The swimming pool would cost $2 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? Using a real discount rate of 6 percent, which project

offers larger net benefits? [Hint: When the time spans for projects are different, we

cannot choose one project over another only based on the Net Present Value, you have

to roll over the shorter projects until all projects have the same time span].

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