A dam is proposed on a stretch of wild river, a river that is currently used for

Question

A dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will be full of sediment and the dam will need to be removed. The following are the characteristics of the dam:

Initial Cost: $100,000,000

Electricity produced: 100, 000 Mwh per year, @ $100/Mwh.

Cost of decommissioning dam: $10,000,000

Value of recreation lost: $5,000,000 per year.

c) Calculate the “cutoff” discount rate,r ,such that the dam is a good idea for discount rates < r and a bad idea for discount rates> r

Explanation / Answer

Given,

Cost = 100000000 + 10000000 +5000000 = 115000000

R= I/PxT= 10000000/ 115000000 x 50

= 1/115x5= 1/575

= 2% = Rate

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