Problem:
A school is reviewing its research program. The program requires $30K to run next year in State A or $16K in State B (50% chance either state occurs). The Government will offer $5000 is State A occurs. Without the offer, the project's cash flows can be discounted at 15%, while the risk free rate is 8%.
Required:
Question 1: Calculate present value of the program cost without considering the government subsidy.
Question 2: Calculate present value of the program cost with the government subsidy.
Question 3: Calculate present value of government subsidy.
Question 4: If the current budget for the program is $18K, should the school go forward with the research program?
Question 5: What should the risk-adjusted discount rate be for the project with the Governmet subsidy?
Note: Provide support for rationale.