7 The federal government proposes to construct a multipurpose water project. This project will provide water for irrigation and for municipal uses. In addition, there will be flood control benefits and recreation benefits. The estimated project benefits computed for 10-year periods for the next 50 years are given in Table 16.

The annual benefits may be assumed to be one tenth of the decade benefits.The O&M cost of the project is estimated to be $15,000 per year. Assume a 50-year analysis period with no net project salvage value.

TABLE 16 First Second Third Fourth Fifth Purpose decade decade decade decade decade Municipal $40,000 $50,000 $60,000 $70,000 $110,000 Irrigation $350,000 $370,000 $370,000 $360,000 $350,000 Flood control $150,000 $150,000 $150,000 $150,000 $150,000 Recreation $60,000 $70,000 $80,000 $80,000 $90,000 Totals $600,000 $640,000 $660,000 $660,000 $700,000

a. If an interest rate of 5% is used and there is a B/C ratio of unity, then what capital expenditure can be justified to build the water project now?

b. If the interest rate is changed to 8%, then how does this change the justified capital expenditure?