New York City is considering building a dike in the waters off the coast to prevent severe flooding during hurricanes and windstorms. Suppose there is a one-time cost of the project of $1000 that NYC will pay immediately (in year 0). It is expected that benefits of the project resulting from lower damage from flooding will be $1200. However, these benefits will not be realized for some time, and for simplicity we assume that the benefits are spread out and will be 0 in year 0, 0 in year 1, 0 in year 2, and $1200 in year 3. We will assume that the $1000 cost results in $1000 less of private investment so the before-tax rate of return is the appropriate discount rate. Since the interest rate can vary substantially in these uncertain times, the Mayor of New York asks your advice on whether to go ahead with the project under two scenarios: (i) the discount rate is .03 and (ii) the discount rate is .07.
1. What would you tell the Mayor for the first scenario?
2. What would you tell the Mayor for the second scenario?
New York City is considering building a dike in the waters off the coast to prev
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