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

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

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

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