This question conoerns BCA for building a permanent dam. The cost of constructing the permanent dam (l.e, a dam that is expected to last forever) is S425 million The annual benefits will depend on the amount of rainfall: $18 milion in a "dry" year, $20 milion in a wet year, and $52 million in a "food" year. Meteorological records indicate that over the last 100 years there have been 86 "dry years, 12 wet" years, and 2 lood" years. Assume the annual benefts, measured in real dollars, begin to accrue at the end of the frst year a Using the meteorological records as a basis for prediction, what are the present value expected net benetts of the dam if the real diucount rate is 5 percent b. is it officient to build the dam? Why or why not? e. is your conclusion sensitive to the assumed discount rate or is it robust? To answer tis question, use the federal government guidelnes which currerdy requires agmoes to do their caloulations using a 3% discount rate and also a 7% discount rate d. Another way to investigate this sensitivity is to cakoulate the break even vale for the discount rate. Calculate this value and agan decide if the concknion is robust regarding the discount rate

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question
4
This question concerns BCA for building a permanent dam. The cost of constructing the permanent dam (l.e., a dam that is expected to last forever) is S425 million.
The annual benefits will depend on the amount of rainfall: $18 million in a "dry" year, $20 milion in a wet" year, and $52 million in a "lood" year. Meteorological records indicate that
over the last 100 years there have been 86 "dry" years, 12 wet" years, and 2 ood" years. Assume the annual benefts, measured in real dollars, begin to accrue at the end of the frst
year
a Using the meteorological records as a basis for prediction, what are the present value expected net benefits of the damif the real discount rate is 5 percent?
b. Is it efficient to build the dam? Why or why not?
C Is your conclusion sensitive to the assumed discount rate or is it robust? To answer this question, use the federal government guidelines which currendly requires agmces
to do their caloulations using a 3% discount rate and also a 7% discount rate
d. Another way to investigate this sensitivity is to calculate the break even vale for the discount rate. Calculate this value and agan decide if the conclusion is robust
regarding the discount rate
Transcribed Image Text:This question concerns BCA for building a permanent dam. The cost of constructing the permanent dam (l.e., a dam that is expected to last forever) is S425 million. The annual benefits will depend on the amount of rainfall: $18 million in a "dry" year, $20 milion in a wet" year, and $52 million in a "lood" year. Meteorological records indicate that over the last 100 years there have been 86 "dry" years, 12 wet" years, and 2 ood" years. Assume the annual benefts, measured in real dollars, begin to accrue at the end of the frst year a Using the meteorological records as a basis for prediction, what are the present value expected net benefits of the damif the real discount rate is 5 percent? b. Is it efficient to build the dam? Why or why not? C Is your conclusion sensitive to the assumed discount rate or is it robust? To answer this question, use the federal government guidelines which currendly requires agmces to do their caloulations using a 3% discount rate and also a 7% discount rate d. Another way to investigate this sensitivity is to calculate the break even vale for the discount rate. Calculate this value and agan decide if the conclusion is robust regarding the discount rate
Expert Solution
steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Knowledge Booster
Market Efficiency
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education