The government of Tomorrowland is contemplating the construction of a dam, which has a useful life of 10 years. It takes two years for the construction to be completed at a capital costs are $ 450,000 per year. Upon construction, the annual maintenance costs are $ 50,000. The dam will produce 5 million units of electricity annually, which can be sold to consumers at 5 cents per unit. In addition, the dam can serve as a tourism destination attracting 25,000 tourists on an annual basis. The government intends to charge a $2 entry fee per visitor.

Calculate the net present value of this project using 3% discount rate and the benefit-cost ratio. Should the government undertake this project? Justify your answer.

At the beginning of year 5, the government decides that some of the dam’s water can be used for the irrigation of nearby sugarcane fields. The cost of constructing a pipeline is $ 2 million and it takes one full year for the construction to be completed (assume that the costs are incurred on the last day of year 5 or the first day of year 6). Irrigated fields produce an additional 20000 tons of sugarcane that can be sold at 25 cents per ton. Calculate the revised net present value of this project. Should the government undertake this project? Justify your answer.

Answer rating: 100% (QA)

A Initial projects net present value NPV is as follows We must first determine the projects yearly cash flows Capital expenses 450000 multiplied by 2 ... View the full answer