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.

Expert Solution

jeff jeffy answered 2 years ago

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