Past flooding along the Arkansas River (referred to as ‘river’ in the following) has caused the Army Corps of Engineers (referred to as ‘Corps’ in the following) to evaluate some of the drainage plans along the river. The Corps is considering three proposals for increasing the capacity of the existing main drainage canal in an agricultural region of Oklahoma.

Proposal A requires dredging the existing canal to remove sediment and weeds that have accumulated during previous years’ operation. The capacity of the canal will have to be maintained in the future near its design peak flow because of increased water flows. The Corps is planning to purchase the dredging equipment and accessories for $650,000. The equipment is expected to have a 10-year life with a $17,000 salvage value. The annual operating costs are estimated to total $50,000. To control weeds in the canal itself and along the banks, environmentally safe herbicides will be sprayed prior to the traditional spring run-off season. The yearly cost of the weed control program is expected to be $120,000.

Proposal B is to line the canal with concrete at an initial cost of $4 million. The lining is assumed to be permanent, but minor maintenance will be required every year at a cost of $8000. In addition, lining repairs will have to be made every 5 years at a cost of $30,000. It should be noted that the Corps projects the annual minor maintenance costs to increase at about 1% every five years of life starting after the fifth year.

Proposal C is to construct a new pipeline along a different route. Estimates are an initial cost of $8 million, annual maintenance of $13000 for right-of-way etc., and a life of 50 years. In addition there is a required internal ultrasonic inspection for corrosion every 10 years at a cost of $50,000.

The estimated annual savings for adopting plans A or B to the current flood drainage system will be about $10,000 per year on average clean-up costs for this flood plain area. However, plan C because of its more radical solution would likely save on average $25,000 per year in clean-up costs.

As with any decision, this one is not without controversy. The Corps wishes to demonstrate its thoroughness in its approach to the study. Hence not only is the decision to be made on the basis of economic principles but an analysis needs to constructed to show how sensitive the decision is to such factors as changing upfront costs, annual costs as well as interest rates. Currently, the interest rate used by the Corps is 5%.

Analysis of this case is in two parts. First, chose on the basis of equivalent worth or internal rate of return which project proposal should be chosen by the Corps. Second, for each project choice construct an appropriate graph that shows the sensitivity of each alternative to the factors described above or any other that is deemed appropriate. Be sure to describe which project is the most sensitive to a choice reversal.