Does the project satisfy the kaldor-hickscriterion

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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-Hickscriterion? (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 withannual incomes above $100,000) and all costs are paid by an "underprivileged" group. What is therelative internal weight on the underprivileged group? Should the policy be enacted if the "true" socialweight is greater or less than the internal weight? Explain.

c) Suppose instead that 50% of the initial (Year 0) costs displace private investment and theshadow price of capital (SPC) is 1.25. Ignoring distributional issues and using the SPC method, what isthe NPV of the project?

Reference no: EM13342828

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