A public project has the following costs and benefits (in real dollars): Assume that 6% is the appropriate discount rate and that all costs and benefits displace only consumption.
a) What is the net present value (NPV) of the project? Does the project satisfy the Kaldor-Hicks criterion? (You Could show division of Year 0 cost by 1.06= 1 if desired)
b) Suppose that all benefits are received by a "privileged" group in society (e.g., those with annual incomes above $100,000) and all costs are paid by an "underprivileged" group. What is the relative internal weight on the underprivileged group? Should the policy be enacted if the "true" social weight is greater or less than the internal weight? Explain.
c) Suppose instead that 50% of the initial (Year 0) costs displace private investment and the shadow price of capital (SPC) is 1.25. Ignoring distributional issues and using the SPC method, what is the NPV of the project?