Consider the following data from a hypothetical dam construction project.Does the project make economic sense if the interest rate is 5% per year?Explain your answer using numerical calculations.(Please show your calculations clearly, including the time line diagram, otherwise there can be no partial credit.)
Potential Costs
- Construction cost: $20,000 per year for years 0 – 7
- Operating and maintenance (O&M) costs: $10,000 per year for years 8 – 50
- Opportunity cost of land: $15,000 annually for years 8 through eternity
- Loss of service from free flowing river: $7,000 annually for year 8 through eternity
Potential Benefits
- Electricity generation: $60,000 per year for years 8 – 50
- Flood control: $8,000 per year for years 8 through 50
- Reservoir recreation: $7,500 per year for years 8 through 50