The State of Glottamora has $100 million remaining in the budget for the curre

The State of Glottamora has $100 million remaining in the budget for the current year.

One alternative is to give Glottamora a one-time tax rebate. Alternatively two proposals have been made for state expenditures of these funds.

The first proposal project is to invest in a new power plant costing $100 million and have an expected useful life of 20 years. Projected benefits accruing
from this project are as follows:

years

Benefits per year

($ millions)

1-5

$0

6-20

20

The second alternative is to undertake a job retraining program also costing $100 million and generating the following benefits:

years

Benefits per year

($ millions)

1-5

$20

6-10

14

11-20

4

The state Power Department argues that a 5 percent discount factor should be used in evaluating the projects because that is the government%u2019s borrowing
rate. The Human Resources Department suggests using a 12 percent rate because that more nearly equals society%u2019s true opportunity rate.

C. What rate do you believe to be more appropriate?