The federal government proposes to construct a multipurpose water project to provide water for irrigation and municipal use. In addition,
The federal government proposes to construct a multipurpose water project to provide water for irrigation and municipal use. In addition, flood control and recreation benefits will be realized. The estimated benefits of the project computed for 10 year periods for the next 50 years are given in Table P16-17. The annual benefits may be assumed to be one-tenth of the decade benefits. The operation and maintenance cost of the project is estimated to be $15,000 per year. Assume a 50-year analysis period with no net project salvage value.
(a) If an interest rate of 5% is used, and a benefit cost ratio of unity, what capital expenditure can be justified to build the water project now?
(b) If the interest rate is changed to 8%, how does this change the justified capital expenditure?
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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