A flood control project has construction cost during the first year (i.e. at EOY 1) of...

A flood control project has construction cost during the first year (i.e. at EOY 1) of $10 million, during the second year of $7 million, and during the third year of $4 million, It is completed at the end of the third year and thereafter incurs an annual operating cost of $170,000 per year. Benefits from the project begin during the fourth year and are valued at $1,300,000 in that year, growing at a 2% rate of increase out to the end of the project life, which is 50 years (i.e., three years of construction, 47 years of operation). Assuming an interest rate of 7%, determine if this is a viable project, that is do the capitalized benefits exceed the capitalized costs?

Expert Solution

Justification has been provided below :-

Detailed table of present value of benefits for 47 years has been provided below :-

Year	Amount(In $)	Present value factor @ 7%	Present value
1	1300000	0.93458	1214953
2	1326000	0.87344	1158180
3	1352520	0.81630	1104059
4	1379570	0.76290	1052468
5	1407162	0.71299	1003287
6	1435305	0.66634	956404
7	1464011	0.62275	911713
8	1493291	0.58201	869109
9	1523157	0.54393	828497
10	1553620	0.50835	789782
11	1584693	0.47509	752876
12	1616387	0.44401	717695
13	1648714	0.41496	684158
14	1681689	0.38782	652188
15	1715322	0.36245	621712
16	1749629	0.33873	592660
17	1784621	0.31657	564965
18	1820314	0.29586	538565
19	1856720	0.27651	513399
20	1893855	0.25842	489408
21	1931732	0.24151	466538
22	1970366	0.22571	444738
23	2009774	0.21095	423955
24	2049969	0.19715	404144
25	2090968	0.18425	385259
26	2132788	0.17220	367256
27	2175444	0.16093	350095
28	2218952	0.15040	333735
29	2263331	0.14056	318140
30	2308598	0.13137	303274
31	2354770	0.12277	289102
32	2401865	0.11474	275593
33	2449903	0.10723	262715
34	2498901	0.10022	250438
35	2548879	0.09366	238735
36	2599856	0.08754	227580
37	2651854	0.08181	216945
38	2704891	0.07646	206807
39	2758988	0.07146	197144
40	2814168	0.06678	187931
41	2870452	0.06241	179149
42	2927861	0.05833	170778
43	2986418	0.05451	162798
44	3046146	0.05095	155190
45	3107069	0.04761	147938
46	3169210	0.04450	141025
47	3232595	0.04159	134435
Total	23257520

ekkarill92 answered 3 years ago

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