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The proposal for building a new dam on the Colorado River estimates an initial cost of $1,500,000. The dam has an expected useful life of
The proposal for building a new dam on the Colorado River estimates an initial cost of $1,500,000. The dam has an expected useful life of 60 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 $80,000 per year starting at year 1,but expected to increase starting at year 20 at 6% per year until the end of life of the dam (geometric gradient for years 20 to 60 ). Annual maintenance and administrative costs will be $20,000 /year for the first 50 years but are expected to increase by $1,000 /year starting the last 10 years of life (arithmetic gradient for years 51-60). Given the foregoing information: (a) Draw two Cash Flow Diagrams, one for the benefits and one for the costs (b) Using NPV, is the proposal justified for an interest rate of 6% ? (c) What do the annual receipts from energy sales need to be in year 1 (with same \%increase in costs in later years) to just break even on the dam
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