The federal government proposes to construct a multipurpose water project to provide water for irrigation and municipal use. In addition, there are flood control and recreation benefits. The benefits are given below. The annual benefits are 1/10th of the decade benefits. The operation and maintenance cost is $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?

(Benefits in 1,000s)

Decades

Purpose First Second Third Fourth Fifth

Municipal $40 $50 $60 $70 $110

Irrigation $350 $370 $370 $360 $350

Flood Control$150 $150 $150 $150 $150

Recreation $60 $70 $80 $80 $90

Totals $600 $640 $660 $660 $700