Q1. The initial cost of constructing a permanent dam (i.e., a dam that is expected to...

Q1. The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever) is $425 million. The annual net benefits will depend on the amount of rainfall: $18 million in a "dry" year, $29 million in a "wet" year and $52 million in a "flood" year. Meteorological records indicate that over the last 100 years there have been 86 "dry" years, 12 "wet" years, and 2 "flood" years.

Assume the annual benefits, measured in real dollars, begin to accrue at the end of the first year. Using the meteorological records as a basis for prediction, what are the net benefits of the dam if the real discount rate is 5 percent?

Q2. Use the following alternative discount rate values (0.01; 0.03; 0.04; 0.06; 0.07) to investigate the sensitivity of the present value of net benefits of the dam in Q1 to the assumed value of the real discount rate. Compute the "breakeven" value of the discount rate, dBE.

Please provide your calcluation.

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Q1) A project requires an initial investment of $5,000. It is expected that the project will...

Q1) A project requires an initial investment of $5,000. It is expected that the project will last 3 years and generate net cash flows of $3,500 for each of these years. If the discount rate for the project is 10%, the discounted payback period for the project.is: Select one: a. 1.63 years b. 2.55 years c. 1 year d. More than 3 years Q2) Capital rationing refers to the limiting of capital resources to under-performing divisions. Select one: True False...

o The initial capital cost will be $500,000 paid at the beginning of year 1 (i.e.,...

o The initial capital cost will be $500,000 paid at the beginning of year 1 (i.e., immediately). The impact on cottage owners will involve a loss of $50,000 at the end of each year for the first four years (because of the construction activities affecting property values) but cottage owners will benefit by $55,000 per year in perpetuity from the end of year 5 onwards. The benefits from recreational fishing will not start until the end of year 5 and...

The initial capital cost will be $500,000 paid at the beginning of year 1 (i.e., immediately)....

The initial capital cost will be $500,000 paid at the beginning of year 1 (i.e., immediately). The impact on cottage owners will involve a loss of $50,000 at the end of each year for the first four years (because of the construction activities affecting property values) but cottage owners will benefit by $55,000 per year in perpetuity from the end of year 5 onwards. The benefits from recreational fishing will not start until the end of year 5 and will...

You are analyzing a project with an initial cost of £48,000. The project is expected to...

You are analyzing a project with an initial cost of £48,000. The project is expected to return £11,000 the first year, £36,000 the second year and £38,000 the third and final year. There is no salvage value. The current spot rate is £0.6211. The nominal return relevant to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 4 percent while it is 5 percent in the U.K. Assume that uncovered interest rate parity...

Q1) An investment with an initial cost of $16,000 produces cash flows of $5000 per year for...

Q1) An investment with an initial cost of $16,000 produces cash flows of $5000 per year for 5 years. If the required rate of return is 10%, - what is the payback period? - what is the discounted payback period for the investment? Q2) The Balistan Rug Company is considering investing in a new loom that will cost $12,000. The new loom will create positive end of year cash flow of $4999.62 for each of the next 3 years. The internal...

a project with an initial cost of $73,600 is expected to generate annual cash flows of...

a project with an initial cost of $73,600 is expected to generate annual cash flows of $16,360 for the next 8 years. what is the projects internal rate of retu

A project has an initial cost of $148,400 and is expected to produce cash inflows of...

A project has an initial cost of $148,400 and is expected to produce cash inflows of $56,500, $69,540, and $97,867 over the next three years, respectively. What is the discounted payback period if the required rate of return is 10 percent? A. 2.12 years B. 2.54 years C. 2.91 years D. 1.88 years

A central air conditioning unit was installed at an initial cost of $65,000 and was expected...

A central air conditioning unit was installed at an initial cost of $65,000 and was expected to have a salvage value of $5,000 after a service life of 12 years. a) What amount had accumulated in a straight-line depreciation reserve at the end of the 5th year? b) Using double declining balance depreciation, determine the book value at the end of the 9th year. c) If the equipment was sold in the 6th year for $10,000, what sunk cost would...

A project has an initial cost of $1,000,000 and is expected to last for 2 years....

A project has an initial cost of $1,000,000 and is expected to last for 2 years. In year 1, depreciation charge will be $100,000 and earnings are expected to be $164,747. In year 2, depreciation will be $100,000 and earnings are expected to be $208,905. Assume the required return is 8%. What is the value of this project?

A project with an initial cost of $30,700 is expected to provide cash flows of $10,950,...

A project with an initial cost of $30,700 is expected to provide cash flows of $10,950, $11,800, $14,900, and $9,400 over the next four years, respectively. If the required return is 9.2 percent, what is the project's profitability index? 1.392 1.031 1.134 1.237 .808

Subjects