Question

The U.S. Department of Interior is planning to build a dam and construct a hydroelectric power plant. In addition to producing electric power, this project will provide flood control, irrigation, and recreational benefits. The estimated benefits and costs expected to be derived from the three alternatives under consideration are listed as follows: Design 1 - Initial invesment = $198 million - Annual recurring benefits = $37 million - Annual recurring costs = $15 million Design 2 - Initial investment = $155 million - Annual recurring benefits = $48 million - Annual recurring costs = $15 million Design 3 - Initial investment = $212 million - Annual recurring benefits = $48 million - Annual recurring costs = $18 million The interest rate is 2.7%, and the life of the project is 36 years. If the three designs are mutually exclusive, which design is the best alternative? You can use incremental benefit-cost ratios or present worth calculations. Enter 1, 2, or 3 as your answer

Answer 1

Design -1
Life of the project	36
Interest rate	2.70%
Initial investment	198
Annual benefit	37.00
Annual cost	15.00
Net benefit	22.00	Annual benefit - Annual Cost
Present value of Net benefit	502.55	Using PV formula with rate as 2.7% nper as 36 and pmt as 22
Net present value	304.55	Present value of net benefit - Initial investment
Design -2
Life of the project	36
Interest rate	2.70%
Initial investment	155
Annual benefit	48.00
Annual cost	15.00
Net benefit	33.00	Annual benefit - Annual Cost
Present value of Net benefit	753.83	Using PV formula with rate as 2.7% nper as 36 and pmt as 22
Net present value	598.83	Present value of net benefit - Initial investment
Design -3
Life of the project	36
Interest rate	2.70%
Initial investment	212
Annual benefit	48.00
Annual cost	18.00
Net benefit	30.00	Annual benefit - Annual Cost
Present value of Net benefit	685.30	Using PV formula with rate as 2.7% nper as 36 and pmt as 22
Net present value	473.30	Present value of net benefit - Initial investment
Based on Net present value Design 2 is the best