A hydroelectric dam is proposed on a stretch of wild river, a river that is currently...

 

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A hydroelectric dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam will flood the area and will generate electricity. The decision maker considers a 40-year planning horizon and the discount rate required by the government to use for projects of this size is 4%. The following are the characteristics of the project: -Initial cost: 2.2 million, and fixed annual operating costs of $0.45 million. -The demand for the electricity is given by P= 100 -0.004Q and the marginal cost of providing electricity to the market is given by P=0.003Q. -Marginal Willingness to Pay for the recreation on this stretch of river is estimated to be MWTP =40-0.0025Q per year. -The dam will reduce air pollution in the area, providing a benefit of $ 0.34 million per year. Formula(s) you might need for the analysis are: PV = (1-(1+r)²) for X starting in year I to t PV = X (¹+(1-(1+7)1+z) T PV = for X starting in year 1 for X starting in year 0 a. (2 marks) Write an expression for the net present value (NPV) of the project. b. (7 marks) Calculate the NPV of the project (hint: group similar items together to avoid repeating similar types of calculations). c. (2 marks) What does use of NPV to evaluate a project imply about the benefits and losses of the winners and the losers from the project? Based on NPV criterion, would you recommend this project? A hydroelectric dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam will flood the area and will generate electricity. The decision maker considers a 40-year planning horizon and the discount rate required by the government to use for projects of this size is 4%. The following are the characteristics of the project: -Initial cost: 2.2 million, and fixed annual operating costs of $0.45 million. -The demand for the electricity is given by P= 100 -0.004Q and the marginal cost of providing electricity to the market is given by P=0.003Q. -Marginal Willingness to Pay for the recreation on this stretch of river is estimated to be MWTP =40-0.0025Q per year. -The dam will reduce air pollution in the area, providing a benefit of $ 0.34 million per year. Formula(s) you might need for the analysis are: PV = (1-(1+r)²) for X starting in year I to t PV = X (¹+(1-(1+7)1+z) T PV = for X starting in year 1 for X starting in year 0 a. (2 marks) Write an expression for the net present value (NPV) of the project. b. (7 marks) Calculate the NPV of the project (hint: group similar items together to avoid repeating similar types of calculations). c. (2 marks) What does use of NPV to evaluate a project imply about the benefits and losses of the winners and the losers from the project? Based on NPV criterion, would you recommend this project?