HW_5_Solutions_Problem_Set - AEM 250 Spring 2008 HW #5...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
AEM 250 Spring 2008 HW #5 Solutions 1. a. The construction costs over three years, including interest, expressed in year 4 are: [$500 m * (1+r) 3 ] + [$500 m * (1+r) 2 ] + [$500 m * (1+r) 1 ] Thus, using each discount rate, the present value of construction costs are: Construction costs at 10% = $500 m * [(1.1 3 )+(1.1 2 )+1.1] = $1,821 m Construction costs at 5% = $500 m * [(1.05 3 )+(1.05 2 )+1.05] = $1,655 m The present values of operating costs evaluated at each discount rate are: Operating costs at 10% = $50 m / 0.1 = $500 m Operating costs at 5% = $50 m / 0.05 = $1,000 m The annual costs of flooding agricultural and forest land can be converted to present values using the formula PV = C i /r. At a 10% discount rate, PV is 10* C i and with a 5% discount rate, PV is 20* C i . The annual benefits of hydropower are $150 million (3 billion kW-hours times $0.05 per kW-hour). The annual benefits of irrigation water are $75 million (5 billion gallons times $0.015 per gallon). These benefits can be converted to present values using the formula PV = B i /r. At a 10% discount rate, PV is 10* B i and with a 5% discount rate, PV is 20* B i . We can now express all quantifiable costs and benefits in the table below. Cost/Benefit 10% discount rate 5% discount rate Construction costs $1,821 m $1,655 m Operating costs $500 m $1,000 m Agricultural products costs $450 m $900 m Forest products costs $200 m $400 m Total Costs $2,971 m $3,955 m Hydropower benefits $1,500 m $3,000 m Irrigation benefits $750 m $1,500 m Total Benefits $2,250 m $4,500 m Net Benefits -$721 m $545 m
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Based on quantifiable costs and benefits, the project offers net benefits at a 5% discount rate but not at a 10% discount rate – hence, the selectionof the discount rate is extremely important in benefit cost analyses! Consideration of unquantified costs (relocation costs, watershed damage, and habitat damage) will
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 6

HW_5_Solutions_Problem_Set - AEM 250 Spring 2008 HW #5...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online