1. (40 points) You are evaluating two potential public projects to implement in your local jurisdiction. Both projects have a 10 year time horizon. For Project Alpha, the cost at the end of the first year is $1,000,000 and $100,000 each year thereafter. There are no benefits in the first two years but are constant at $300,000 per year thereafter. For Project Beta, the cost at the end of the first year is $1,000,000 and $90,000 each year thereafter. Benefits are constant at $200,000 per year for all years.
Use Excel to answer the following questions in 2-5 sentences each. You have to provide your answers here even if you are attaching a separate Excel file.
1) What is the NPV for Project Alpha? In your answer explain what NPV is, why it’s useful as well as its shortcomings.
2) Does Project Alpha pass the economic efficiency test based on your answer in part 1)? Why? Explain?
3) What is the BCR for Pro Project Alpha? In your answer explain what BCR is, why it’s useful as well as its shortcomings.
4) Does Project Alpha pass the economic efficiency test based on your answer in part 3)? Why? Explain?
5) What is the IRR for Project Alpha? In your answer explain what IRR is, why it’s useful as well as its shortcomings.
6) Does Project Alpha pass the economic efficiency test based on your answer in part 5)? Why? Explain?
7) Are your conclusions about economic efficiency consistent in parts 2), 4), and 6)? Why or why not? Did you expect this?
8) What is the NPV for Project Beta?
9) Does Project Beta pass the economic efficiency test based on your answer in part 8)? Why? Explain?
10)What is the BCR for Project Beta?
11) Does Project Beta pass the economic efficiency test based on your answer in part 10)? Why? Explain?
12)What is the IRR for Project Beta?
13)Does Project Beta pass the economic efficiency test based on your answer in part 12)? Why? Explain?
14)Are your conclusions about economic efficiency consistent in parts 9), 11), and 13)? Why or why not?
15)Which project would you recommend? Why?
16)What if I told you that Project Alpha is a football stadium and Project Beta is a hospital and your jurisdiction currently does not have either? Would your answer change? Why or why not?
17)Instead of implementing either project, if you invested your $1,000,000 today at a 5% interest rate which compounds quarterly, how much money would you have in 10 years?
2. (28 points) It’s that time of the year and you have to calculate your federal taxes. (Lucky for you, there are no state or local income taxes where you live.) You have gathered these data about your finances:
i. Wage income = $45,000
ii. Corporate bond interest income = $800
iii. US Treasury bond interest income = $1000
iv. Tax-exempt Interest income from the bond issued by the State of Georgia = $600
v. Total itemized deductions = $12,000
Use the personal exemptions, standard deductions and rate schedule in this link:https://taxfoundation.org/2017-tax-brackets/
First, suppose you are single:
1) What is your marginal tax rate?
2) What is your tax liability?
3) What is your effective tax rate?
4) How would a $1,000 tax credit change your tax liability and effective tax rate?
Now, suppose you are married and your spouse has no wage or interest income and your joint itemized deductions are still $12,000:
5) What is your joint marginal tax rate?
6) What is your joint tax liability?
7) What is your joint effective tax rate?
8) How would a $1,000 tax credit change your tax liability and effective tax rate?
Now, suppose you are married and your spouse has the exact same income profile as you and your joint itemized deductions are still $12,000:
9) What is your joint marginal tax rate?
10)What is your joint tax liability?
11) What is your joint effective tax rate?
12)How would a $1,000 tax credit change your tax liability and effective tax rate?
13)Do you think this is fair? Does this make you want to get married or stay single?
14)Is this tax system progressive, regressive, or proportional? Why?
3. (14 points) A small town has a property tax base with an appraised value of $400,000 of taxable real property, $80,000 of taxable personal property, and $50,000 of non-taxable property. The assessment ratio is 40% for this local government. The homestead exemption is relatively small but reduces the assessed value by $50,000. The town estimates that the budgetary needs at $120,000.
1) What statutory tax rate would allow the town to meet its budgetary obligations?
2) Given the statutory tax rate you found in part 1), what is the effective property tax rate for this town?
3) You are contemplating about moving to this town. The property you are interested in buying has a market value of $150,000. How much would you pay in property taxes to this school district?
4) How would your answer in part 3) change if you discovered that you could get a $5,000 exemption against the assessed value of your new home?
5) Would your property tax bill affect your decision to move to this town? Why or why not? What other information might be helpful in making your decision?
6) Suppose that the property tax rate you found in part 1) increases by 3%. What is the new rate and your new tax bill?
7) Suppose that the property tax rate you found in part 1) increases by $1 per $100 of assessed value. What is the new rate and your new tax bill?
4. (12 points) Suppose you are in the 25% federal income tax bracket and want to invest $100,000 in an interest-earning asset.
1) Which asset would you invest in and why:
i. AAA rated (highest rating) municipal bond with a 4% yield or
ii. AAA rated (highest rating) corporate bond with a 5.4% yield
iii. U.S. treasuries with a 5.5% yield? Explain.
2) Suppose you get a large pay raise and your marginal income tax rate is now 39.6%. How would your answer change in part 1)?
3) What do you conclude about the value of tax-exemption for different income groups?
4) Do you think this type of tax preference is fair?
5) Would you answer change if the corporate bond rating declined to below investment grade? Why?
6) Would your answer change if the municipal bond rating declined to below investment grade? Why?
5. (6 points) Explain the role of financial statement analysis, Balance Sheet and Income Statement, and financial ratios in evaluating financial health of a jurisdiction or an organization in 1-2 paragraphs.
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