2. (30 points) The Wisconsin DNR is considering a request by Greenstuff to remov

Question

2. (30 points) The Wisconsin DNR is considering a request by Greenstuff to remove the dam in Cedar Falls on the Red Cedar River. It will cost $800,000 today to remove the dam. Land restoration will cost $100,000 every 5 years, starting today (years 0, 5, 10, etc.). Flooding losses on houses and farm property will be $100,000 per year. The loss of revenue to the power company would be $50,000 per year. Increased recreational use from fishing, rafting, etc. will be $200,000 per year. State interest is in a bond charging 8% per year compounded quarterly. Perform a benefit/cost analysis for this problem, assuming the dam is removed forever. A. What is the effective annual interest rate for this problem? B. Identify each item as a benefit, disbenefit, cost, or M&O cost (maintenance and operation). C. Find the benefit/cost ratio for this project. Convert all costs to annual costs first. Complete on excel.

Explanation / Answer

Particulars Amount Interest Rate 8.00% Compounding Quarterly Effective Annual Interest Rate 8.24% Benefit $200000.00 p.a Disbenefit $150,000.00 p.a Cost $800,000.00 M&O Cost (Maintenance And Operation) $300,000.00 P.V of yearly Benefit $         16,86,763.35 P.V of yearly Dis-benefit $        -12,65,072.52 P.V of Cost $        - 8,00,000.00 P.V of M&O Cost (Maintenance And Operation) $        -2,12,609.63 Benefit/Cost ratio = (Benefits-Disbenefits)/Costs = 0.53

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