The Initial Cost of Constructing a Flood Control Dam Is

question 8

Essay

The initial cost of constructing a flood control dam is estimated to be $5 million, with annual upkeep costs of $340,000. Annual benefits (e.g., reduced flood damage, agricultural development, and tourism, etc.) are expected to be $1.25 million, whereas the disbenefits from significant ecological and human social changes are expected to be $0.025 million per year. Assume the dam will have a useful life of 53 years. At an interest rate of 17% per year, should the dam be constructed on the basis of its conventional B- C ratio, with AW as the equivalent- worth measure?

---

Definitions:

Budget Lines

A graphical representation of all possible combinations of two goods that can be purchased with a fixed income.

Indifference Curves

Graphical representations of a consumer's preferences, showing different combinations of two goods between which the consumer is indifferent.

VCR

A video cassette recorder, a device once commonly used to play and record television programs and movies on magnetic tape.

Perfect Substitutes

Goods or services that can be used in exactly the same way, thus one can completely replace another in consumption.