Project Evaluation

Exams

1.011 Midterm

This exam has three questions of unequal weight. We suggest you read the entire exam before you start work.

OPEN BOOK, OPEN NOTES

No computers or phones. Calculators and interest tables are allowed.

Good luck!

Question 1 (30 points)

1. We have discussed the concepts of environmental justice and evaluative complexity in class. Define both terms in two to three sentences each. For each concept, give an example to illustrate how it applies (or might apply) to your term project topic. (We guarantee you there are examples!)

(12 points)

1. Explain what a decommissioning cost is. Why is it often of little importance in a project evaluation? When may it matter? (Hint: The answer we are looking for is not “when the decommissioning costs are very large”.)

(8 points)

1. You are a profitable, private sector firm. You invest $1 million to build some infrastructure. Your infrastructure is a long-lived asset and you are depreciating it in a straight-line manner. You have a choice between depreciating it over 10 years or over 20 years. Explain the advantages and disadvantages of each choice.

(10 points)

Question 2 (30 points)

You have inherited an apartment building in Cambridge. Annual rents total $200,000 and annual operating expenses total $100,000. So your profits are $100,000. The building is in reasonable condition, and your real estate agent expects that identical profits will be earned for another 20 years.

You will need to choose discount rates in a) and b). Be sure to provide a brief justification of your choices. Also, assume no inflation and ignore taxes.

1. You receive an offer from MIT to buy the building for $1.5 million; Explain why you should or should not accept the offer.

(15 points)

1. Your best friend advises you to drop out of MIT, live off the profits for 20 years, and then sell the building to cover your retirement. What do you think you could sell the building for in 20 years, assuming MIT is no longer bidding and that the asking price will be what entrepreneurs will be willing to pay for the cash flows? Would you follow your friend’s recommendation?

(15 points)

Question 3 (40 points)

Please carefully read the following article:

Cheney, Kyle. “Decaying Dams Pose Risk, Engineers Say.” Boston Globe, March 15, 2011.

This article discusses the condition of dams across the state of Massachusetts and highlights the various impacts of decay and the subsequent need for action. Senator Marc Pacheco has proposed a bill establishing a loan program to provide funding to cities and towns for repair or decommissioning of deteriorating dams.

1. Identify 5 important stakeholders. Describe their interests and whether they would favor the legislation or not. You should be able to do this in \<1/3-page per stakeholder.

(15 points)

1. Assume the bill fails to pass. Give one example each of the following impacts:
   1. social,
   2. environmental,
   3. economic

A sentence or two for each type of impact should suffice.

(9 points)

1. Assume that the bill has passed and you have the task of developing a prioritized list of dams to receive funding. Explain in \<1 page how you would go about this task.

(16 points)