Question 1 (25 marks) a) A dam is being considered to reduce river flooding in the Kowloon River Basin. Information concerning the possible alternative is given in Table 1. Which dam height minimizes the expected total annual cost? Assumed that the interest rate is 5% for flood protection projects, and all dams must last 50 years. (15 marks) Dam Height, H(m) 0 20 30 40 First cost ($) 0 700,000 800,000 900,000 Table 1. Annual probability Damages ($) if of flood if height = flooding occurs 0.25 800,000 0.05 500,000 0.01 300,000 0.002 200,000 b) A PolyU company, whose earnings put it in the 35% marginal tax bracket, is considering the purchase of a new piece of equipment for $25,000. The equipment will be depreciated by using the straight-line method over a 4-year depreciable life to a salvage value of $5000. It is estimated that the equipment will increase the company's earnings by $8000 for each of the 4 years it is used. Should the equipment be purchased (after-tax)? Use an interest rate of 10%. (hint: taxable income = income - depreciation) (10 marks)