A dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will be full of sediment and the dam will need to be removed. The following are characteristics of the dam: Initial Cost: $100,000,000 Electricity produced: 100,000 MWh per year, at $100/MWh. Cost of decommissioning dam: $10,000,000. Value of recreation lost: $5, 000, 000 per year. 1. If the social discount rate is 3% per year, is the dam a good idea? 2. If the social discount rate is 10% per year. is the dam a good idea?

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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A dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam
will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will
be full of sediment and the dam will need to be removed. The following are characteristics of the
dam:
Initial Cost: $100,000,000
Electricity produced: 100,000 MWh per year, at $100/MWh.
Cost of decommissioning dam: $10,000,000.
Value of recreation lost: $5,000,000 per year.
1. If the social discount rate is 3% per year, is the dam a good idea?
2. If the social discount rate is 10% per year, is the dam a good idea?
3. Calculate the "cutoff" discount rate, c3 such that the dam is a good idea for discount rates
< c and a bad idea for discount rates > c.
Transcribed Image Text:A dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will be full of sediment and the dam will need to be removed. The following are characteristics of the dam: Initial Cost: $100,000,000 Electricity produced: 100,000 MWh per year, at $100/MWh. Cost of decommissioning dam: $10,000,000. Value of recreation lost: $5,000,000 per year. 1. If the social discount rate is 3% per year, is the dam a good idea? 2. If the social discount rate is 10% per year, is the dam a good idea? 3. Calculate the "cutoff" discount rate, c3 such that the dam is a good idea for discount rates < c and a bad idea for discount rates > c.
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