1. The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever) is $830 million. The annual net benefits will depend on the amount of rainfall: $36 million in a “dry” year, $58 million in a “wet” year, and $104 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?
2. Use several alternative discount rate values to investigate the sensitivity of the present value of net benefits of the dam in exercise 1 to the assumed value of the real discount rate.
1. The initial cost of constructing a permanent dam (i.e., a dam that is expected to...
1. The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever) is $830 million. The annual net benefits will depend on the amount of rainfall: $36 million in a “dry” year, $58 million in a “wet” year, and $104 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...
1. 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...
Un chat the mill would be willing to accept? Exercise 3: Benefit/cost analysis, NPV, option value The town of Dryville is considering building a dam in order to provide irrigation water during droughts. If they build the dam this year (year 0) they expect it to provide benefits of $800 in years 0, 1, 2, 3, 4, and 5. After year 5, the dam will be worn out and need to be replaced. 1. What is the net present value...
Problem 1. The construction of a hydroelectric dam will result in the permanent closure of a recreational park. The park has brought $4 million in revenues over the last two years. What is the expected total monetary loss under 4% annual interest rate if this park is permanently closed this year? Problem 2. A 15-year municipal bond was issued 5 years ago. Its coupon interest rate is 8%, interest payments are made semi-annually, and its face value is $1,000. If...
question b and c only please 2) The World Bank is considering an application from the country of Equatoria (not a real country) for a large dam project. Some costs and benefits of the project are as follows: • Construction costs: $500 million per year for three years • Operating costs: $50 million per year • Hydropower to be generated: 3 billion kilowatt-hours per year • Price of electricity: $0.05 per kilowatt-hour Irrigation water available from dam: 5 billion gallons...
Problem Set 7 Cost-Benefit Analysis 1.) The Los Angeles area has long been plagued by urban smog. Suppose that one of several ozone-reducing policy options is being evaluated by economists using benefit-cost analysis. a. Since the policy will be implemented over time, economists assume that per resident benefits will accrue in increments of $500 (in real terms) at the end of each of the next three years. Find the present value of benefits (PVB) in nominal terms for each resident,...
Barcode Biz has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,000, and $823,000 over the next three years. If the opportunity cost of capital is 13 per cent per annum what is the NPV of this project (rounded to the nearest dollar)? Select one: A. $467,273 B. $310,054 C. $299,099 D. $246,702 A company is considering an investment that will cost $852,000 and have a useful life of...
1. A town’s recreation department is trying to decide how to use a piece of land. One option is to put up basketball courts with an expected life of 8 years. Another option is to install a swimming pool with an expected life of 24 years. The basketball courts would cost $180,000 to construct, and yield net benefits of $40,000 at the end of each of the 8 years. The swimming pool would cost $2.25 million to construct, and yield...
Argentina is considering constructing a bridge across the Rio de la Plata. The cost of the new bridge will be $700 million (today). The bridge will require annual maintenance expenses of $10 million per year at the end of each year. The bridge is estimated to last 50 years. The country estimates the bridge will bring in $70 million in income each year at at the end of each year (for the life of the bridge) via tolls. Argentina has...
1) ABC Pharmaceuticals, a large pharmaceutical company headquartered in the Midwest wants to build a new ethanol facility in Nebraska in order to support future increases in demand. The management team of ABC Pharmaceuticals is presented with two different scenarios for its new ethanol facility and will choose the scenario with the greatest net present value. Scenario A: To have the new ethanol facility up and running in 1 year, ABC Pharmaceuticals must invest $2 billion now and will expect...