1.LCCA/NPV

A proposal for building a new dam estimates an initial cost of $1,000,000. The dam has an expected useful life of 80 years and a net salvage value (net proceeds from sale after tax adjustments) of $50,000. Annual receipts from energy sales are expected to be a constant $25,000 per year starting at yr 1, but expected to increase starting at year 10 at 6% per year until the end of life of the dam (yr 10 = 25,000 and year 11=$25,000+ 6%, etc.). Annual maintenance and administrative costs will be $10,000/year for the first 60 years but are expected to increase by $1,000/year starting the last 20 years of life (arithmetic gradient for years 61-80).

Given this information:

I strongly recommend drawing a cash flow diagram.

(a)Using NPV, is the proposal justified for an interest rate of 6%?

(b)What do the annual receipts from energy sales need to be in year 1 to just break even on the dam?