Question

1. The EPA is considering an application from the state of Colorado for a large dam project on the Colorado River. The basic costs and benefits of the project (in inflation-adjusted dollar values) are as follows:

Costs			$900 million/year first three years
Construction costs:
Operating costs:			$80 million/year
Agricultural product lost from flooded lands:			$65 million/year
Forest products lost from flooded lands:			$40 million/year
Benefits
Revenues from Power Generation
	Hydropower generated:		4 billion Kilowatt hours/year
	Price of electricity:		$0.125/Kilowatt hour
Revenues from Irrigation Services
	Irrigation water available from the dam:		200K Acre-Feet
	Price of water:		$700/Acre-Foot

2. Assume that all costs and benefits are paid and received at the end of each year. (It will be easiest to do this using Excel. Help with this can be found in the book as well as using the Excel spreadsheet from the first homework assignment. I will also post another example on CANVAS.) For this part, do the discounting for the CBA using a 7% interest rate. Do your results indicate a definiteyes or no answer for the project?

Table A				Table B
Interest Rate:	0.07
(1)	(2)	(3)		(1)	(2)	(3)
Discount Based on End of the Year	Annual Net Benefits ($)	Present Value Based (7% Interest Rate)		Discount Based on Beginning the Year	Annual Net Benefits ($)	Present Value Based (7% Interest Rate)
1	100.00	$93.46		0	100.00	$100.00
2	100.00	$87.34		1	100.00	$93.46
3	100.00	$81.63		2	100.00	$87.34
4	100.00	$76.29		3	100.00	$81.63
5	100.00	$71.30		4	100.00	$76.29
6	100.00	$66.63		5	100.00	$71.30
7	100.00	$62.27		6	100.00	$66.63
8	100.00	$58.20		7	100.00	$62.27
9	100.00	$54.39		8	100.00	$58.20
10	100.00	$50.83		9	100.00	$54.39
11	100.00	$47.51		10	100.00	$50.83
12	100.00	$44.40		11	100.00	$47.51
13	100.00	$41.50		12	100.00	$44.40
14	100.00	$38.78		13	100.00	$41.50
15	100.00	$36.24		14	100.00	$38.78
16	100.00	$33.87		15	100.00	$36.24
17	100.00	$31.66		16	100.00	$33.87
18	100.00	$29.59		17	100.00	$31.66
19	100.00	$27.65		18	100.00	$29.59
20	100.00	$25.84		19	100.00	$27.65
		$1,059.40				$1,133.56
Notes:	(1) Discounting based on 7% interest rate with discount rate given by (1/(1+0.07)^year).
	(2) Both tables show present value calculations - yearly and total - for 20 $100 net benefit payments. Specifically, column (2) in each table shows how much money is arriving in each of the 20 years ($100) and column (3) shows what each of those $100 payments is worth in present value dollars using a 7% interest rate to discount the money.
	(3) Table A discounts based on the money arriving at the end of each year and Table B discounts based on the money arriving at the beginning of each year.

Answer 1

Assuming the project will be under construction for first 3 years and then run for 17 years.

So, the net benefit indicates that the project should be executed.