The government of Chad is considering two different public projects. The first will improve the sanitation of the water supply. Evidence from other countries suggests that there will be an annual $200,000 saving in the first five years followed by a $2,000,000 annual saving in the next ten years. Afterwards, there will be neither costs nor benefits. The project will cost $1,455,666 for construction and $123,000 annual maintenance of the facility. The second project provides for immunization of infants. Over the same 15 year period, the benefits are expected to be $400,000 and an annual cost of $56,000 after a $500,000 ad campaign to inform people of the project.
a. At an interest rate of 7%, what project would you prefer? Assume that expenditures and receipts are collected at the end of the period.
b. Find the internal rate of return for project 1.
c. What interest rate makes you indifferent between the two? Explain