Question

5.7 The federal government proposes to construct a multipurpose water project. This project will provide water for irrigation and for municipal uses. In addition, there will be flood control benefits and recreation benefits. The estimated project benefits computed for 10-year periods for the next 50 years are given in Table 5.16 TABLE 5.16 Purpose First Second Third Fourth Fifth decade decade decade decade decade $ 40,000 Municipal $ 50,000 $ 60,000 $70,000 $110,000 $350,000 $370,000 $370,000 $360,000 $350,000 Irrigation $150,000 $150,000 $150,000 $150,000 $150,000 Flood Control Recreation $60,000 $70,000 $80,000 $80,000 $90,000 Totals $600,000 $640,000 $660,000 $660,000 $700,000 The annual benefits may be assumed to be one tenth of the decade benefits. The O&M cost of the project is estimated to be $15,000 per year. Assume a 50-year analysis period with no net project salvage value. a. If an interest rate of 5% is used and there is a B/C ratio of unity, then what capital expenditure can be justified to build the water project now? b. If the interest rate is changed to 8%, then how does this change the justified capital expenditure?

Answer 1

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