The initial cost of constructing a flood control dam is estimated to be $5 milli

ID: 1099298 • Letter: T

Question

The initial cost of constructing a flood control dam is estimated to be $5 million, with annual upkeep costs of

$340,000. Annual benefits (e.g., reduced flood damage, agricultural development, and tourism, etc.) are

expected to be $1.25 million, whereas the disbenefits from significant ecological and human social changes are

expected to be $0.025 million per year. Assume the dam will have a useful life of 53 years. At an interest rate of

17% per year, should the dam be constructed on the basis of its conventional B-C ratio, with AW as the

equivalent-worth measure?

Conventional B-C Ratio:

(PW(B))/(I + PW(O&M))

Present worth of benefits = (1.25+0.025)/1.17 + (1.25+0.025)/1.17^2 + (1.25+0.025)/1.17^3 + (1.25+0.025)/1.17^4...........(1.25+0.025)/1.17^53

= 7.50 million

Present worth of upkeep cost = 340,000/1.17 + 340,000/1.17^2 + 340,000/1.17^3 ....................340,000/1.17^53=

$1,999,513.39

B-C Ratio = 7.50/(5 + 1.999513)= 1.07 >1

yes, the dam should be constructed on the basis of its conventional B-C ratio

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