The federal government proposes to construct a multipurpose water project to provide water for irrigation and municipal use. In addition, flood control and recreation benefits will be realized. The estimated benefits of the project computed for 10 year periods for the next 50 years are given in Table P16-17. The annual benefits may be assumed to be one-tenth of the decade benefits. The operation and maintenance cost of the project is estimated to be $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?

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Decades Fourth Fifth First Third Purpose Second $ 60,000 $ 70,000 Municipal Irigation Flood control Recreation $ 50,000 370.000 150,000 70,000 $ 40,000 350,000 150,000 60,000 $110,000 350,000 150,000 370,000 150,000 80,000 360.000 150.000 X0,000 80,000 Totals $700.000 $600,000 $640,000 S660,000 $660.000