Econ 421: Economics of Reed College
Fall 2007
Assignment #5: Geology at Reed
Due: Wednesday, October 31

As you know, Reed is currently planning a major fund-raising campaign. Among the priorities considered for the campaign was the possibility of adding new department/programs. Although the faculty did not recommend dedicating new funding to this use, we are going to suppose that the faculty and administration were willing to support the following proposal.

Minah Gray-Rock is a wealthy alumna who was graduated from Reed in 1956, then went on to make hundreds of millions of dollars in the mineral-extraction industry. She would like to support Reed by endowing a Department of Geology and has the deep pockets to do so. After careful consideration, the Committee on Academic Policy and Planning (CAPP) has agreed that the addition of a geology department would be acceptable, provided that all costs of the department are covered by the initial endowment gift. CAPP has also decided that a viable Reed geology department would require four faculty positions, plus office and lab space, one full-time secretary, and one full-time lab support person. At CAPP's request, a few basic costs have been estimated by Reed staff and outside contractors:

• The librarian estimates that a reasonable geology collection would require a $1,500,000 initial investment plus $50,000 per year ongoing spending on library books and journals.
• It is estimated that the Gray-Rock Building to house the Geology Department would cost a total of $15 million for building and landscaping and for basic furniture and equipment for labs and offices.
• The new building would also add 5% to the college's general expenses for heating, cleaning, and maintenance. It is not expected that the additional of the geology program would increase the size of the student body.

There are, of course, other costs that have yet to be examined or estimated. The president has asked you to come up with a bottom-line number for the present value of the total cost of adding a geology department. In other words, how much should he tell Ms. Gray-Rock that she needs to donate in order to make her dream come true? CAPP admonishes you to be sure to cover the full cost of the program, so make sure that your figure is high enough. However, if your number is too high, Minah may change her mind and make her gift elsewhere, so don't pad the number unnecessarily. Your response should include tables demonstrating your calculations and text explaining the numbers and the assumptions that underly them.