$2.$ Present Discounted Value and Project Evaluation

A local government is considering a temporary flood protection system $($e$.$g$.,$ portable flood barriers$)$ to prevent seasonal flooding in a vulnerable district. This system will be effective for three years before it needs a major overhaul or replacement. The initial investment cost in year $0$ is $$600,000.$ The projected annual flood damage savings $($benefits$)$ over the next three years are:

Year $1$: $$250,000$ The discount rate is $7\%$ per year.

Year $2$: $$200,000$

Year $3$: $$180,000$

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$2\mathrm{.}1$ Compute the Net Present Value $($NPV$)$ of the project

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$2\mathrm{.}2$ Calculate the Benefit$-$Cost Ratio $($BCR$)$

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$2\mathrm{.}3$ Determine the Internal Rate of Return $($IRR$)$

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$2\mathrm{.}4$ If the NPV is positive, should the government implement the project?

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$2\mathrm{.}5$ How sensitive is the decision to changes in the discount rate?

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$2\mathrm{.}6$ If the benefits were extended to five years instead of three, how would that change the financial evaluation?