An area on the Colorado River is subject to periodic flood damage that occurs, on the average, every two years and results in a $2,000,000 loss. It has been proposed that the river channel be straightened and deepened, at a cost of $2,500,000, to reduce the probable damage to not over $1,600,000 for each occurrence during a period of 20 years before it would have to be deepened again. This procedure would also involve annual expenditures of $80,000 for minimal maintenance. One legislator in the area has proposed that a better solution would be to construct a flood-control dam at a cost of $8,500,000, which would last indefinitely, with annual maintenance costs of not over $50,000. He estimates that this project would reduce the probable annual flood damage to not over $450,000. In addition, this solution would provide a substantial amount of irrigation water that would produce annual revenue of $175,000 and recreational facilities, which he estimates would be worth at least $45,000 per year to the adjacent populace. A second legislator believes that the dam should be built and that the river channel also should be straightened and deepened, noting that the total cost of $11,000,000 would reduce the probable annual flood loss to not over $350,000 while providing the same irrigation and recreational benefits. If the state’s capital is worth 10%, determine the B–C ratios and the incremental B–C ratio. Recommend which alternative should be adopted.
An area on the Colorado River is subject to periodic flood damage that occurs, on the average, every two years and results in a $2,000,000 loss. It has been proposed that the river channel be straightened and deepened, at a cost of $2,500,000, to reduce the probable damage to not over $1,600,000 for each occurrence during a period of 20 years before it would have to be deepened again. This procedure would also involve annual expenditures of $80,000 for minimal maintenance. One legislator in the area has proposed that a better solution would be to construct a flood-control dam at a cost of $8,500,000, which would last indefinitely, with annual maintenance costs of not over $50,000. He estimates that this project would reduce the probable annual flood damage to not over $450,000. In addition, this solution would provide a substantial amount of irrigation water that would produce annual revenue of $175,000 and recreational facilities, which he estimates would be worth at least $45,000 per year to the adjacent populace. A second legislator believes that the dam should be built and that the river channel also should be straightened and deepened, noting that the total cost of $11,000,000 would reduce the probable annual flood loss to not over $350,000 while providing the same irrigation and recreational benefits. If the state’s capital is worth 10%, determine the B–C ratios and the incremental B–C ratio. Recommend which alternative should be adopted.
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