Consider a project that costs $100,000 and yields a return of $30,000 for five years. At the end of the fifth year, there is a cost of $30,000 to dispose of the waste from the project.
a. Should the project be undertaken if the discount rate is 0? 10%? 15%?
b. Assume there is uncertainty about the costs of disposing of the waste: there is a 50-50 chance that the costs will be $10,000 or $50,000. Discuss how this uncertainty affects the cost-benefit calculation if the government is: (1) risk neutral (i.e. is indifferent about taking on risk), (2) risk averse (i.e. must be compensated for taking on risk).