Question
The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever) is $425 million. The annual net benefits will
The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever) is $425 million. The annual net benefits will depend on the amount of rainfall: $18 million in a dry year, $29 million in a wet year, and $52 million in a flood year. Meteorological records indicate that over the last 100 years there have been 86 dry years, 12 wet years, and 2 flood years. Assume the annual benefits, measured in real dollars, begin to accrue at the end of the first year. Using the meteorological records as a basis for prediction, what are the net benefits of the dam if the real discount rate is 5 percent?
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