Compute the net present value of the dam

Assignment Help Business Management
Reference no: EM131279455

The following questions all concern a proposal to build a dam to reduce the chances that farmers will be subject to flooding and to increase the availability of water for farm irrigation. Assume that the cost of building the dam is predicted to be $40 million, that net benefits from the dam are predicted to be $6.0 million during each of the 100 years that the dam is expected to operate, and that at the end of the 100 years the dam has no salvage value.

a. Is the option value of the dam likely to be positive, negative, or zero? Briefly explain.

b. Compute the net present value of the dam, assuming that annual net benefits are received at the end of each year. In making this computation, use the conventional approach to discounting and a discount rate of 8 percent. [Please show your work clearly so that I can give you partial credit if it is appropriate to do so.]

c. Does it matter whether the 8 percent discount rate you just used was based on a real or a nominal interest rate? Which should you be using? Briefly explain.

d. Suppose there is uncertainty surrounding the values you used to compute the net present value of the dam in (b). Specifically, benefit-cost analysts believe the discount rate could be as high as 10 percent or as low as 5 percent, the initial cost of building the dam could be as high as $45 million or as low as $35 million, and annual net benefits could be as high as $7 million or as low as $5 million. Given your answer to (b), indicate whether a best-case analysis or a worst-case sensitivity analysis is more appropriate, make the calculations required to do the analysis you selected, and briefly discuss what your calculations imply about whether the dam should be built.

e. Re-compute the net present value of the dam using the shadow price of capital method. In doing this, again assume that the dam would cost $40 million to build and generate annual benefits of $6 million. Also assume that the social rate of time preference is 3 percent and that the shadow price of capital is 2.0. Further assume that all of the costs of building the dam displace private sector investment and that 20 percent of annual net benefits from the dam flows into investment and 80 percent flows into consumption. [Again, please clearly show your work.]

f. Because the dam would produce water for irrigation, it would increase the productivity of the farms using the water. One can think of this new source of water as shifting the supply curve of, say, wheat downward. Assume that the price of wheat is artificially supported at a level above the competitive market price, and that this higher price, which is called a "target price," is the one farmers look to in making their production decisions. Wheat is sold at the price required to induce consumers to purchase all that farmers produce. The government uses tax revenues to pay farmers the difference between this price and the target price. Would building the dam cause the tax revenues paid to farmers to increase or decrease? Use a graph to demonstrate this.

Reference no: EM131279455

Questions Cloud

Find about expatriate living : Choose a country where you wish you would be able to relocate for work as an expatriate. Do research about that country and share what you find about expatriate living. For example, you may find that in China, you can buy a home, but you will not own..
Describe what the author said : Section 1. Give an accurate citation of the article including a URL. Section 2. Describe what the author said. Enclose any exact quotes in quotation marks. Section 3. Add your own analysis.
What are some problems that occur when valuing target firms : What unique problems arise in the acquisition of a not-for-profit business by an investor-owned business as a result of outstanding municipal debt?
Determine the diameter of a steel pipe : The fluid level in the open tank is 150 ft below that in the closed tank. Determine the required diameter of the pipe. Neglect minor losses.
Compute the net present value of the dam : Compute the net present value of the dam, assuming that annual net benefits are received at the end of each year. In making this computation, use the conventional approach to discounting and a discount rate of 8 percent. [Please show your work cle..
Give an adjoining states overview for comparison : Give an adjoining state's overview for comparison.Give an overview of your state's current status in probation and parole
Which approach do you believe to be best : Which approach do you believe to be best? Explain your answer.- What unique considerations arise when valuing small, privately held businesses?
Four step assembly process shown in the flow diagram : The manufacturing company you work for has a four step assembly process shown in the flow diagram below. What is the maximum output this assembly process could produce in 8 hours? If the capacity of Process 4 is increased to 90 units/hr, how many uni..
Develop human resource strategic plan : BSB61015 - Advanced Diploma of Leadership and Management - BSB609 Human Resources Management - evaluate students for the performance outcomes, skills and knowledge required to develop, implement and maintain a strategic approach to managing human r..

Reviews

Write a Review

Business Management Questions & Answers

  Caselet on michael porter’s value chain management

The assignment in management is a two part assignment dealing 1.Theory of function of management. 2. Operations and Controlling.

  Mountain man brewing company

Mountain Man Brewing, a family owned business where Chris Prangel, the son of the president joins. Due to increase in the preference for light beer drinkers, Chris Prangel wants to introduce light beer version in Mountain Man. An analysis into the la..

  Mountain man brewing company

Mountain Man Brewing, a family owned business where Chris Prangel, the son of the president joins. An analysis into the launch of Mountain Man Light over the present Mountain Man Lager.

  Analysis of the case using the doing ethics technique

Analysis of the case using the Doing Ethics Technique (DET). Analysis of the ethical issue(s) from the perspective of an ICT professional, using the ACS Code of  Conduct and properly relating clauses from the ACS Code of Conduct to the ethical issue.

  Affiliations and partnerships

Affiliations and partnerships are frequently used to reach a larger local audience? Which options stand to avail for the Hotel manager and what problems do these pose.

  Innovation-friendly regulations

What influence (if any) can organizations exercise to encourage ‘innovation-friendly' regulations?

  Effect of regional and corporate cultural issues

Present your findings as a group powerpoint with an audio file. In addition individually write up your own conclusions as to the effects of regional cultural issues on the corporate organisational culture of this multinational company as it conducts ..

  Structure of business plan

This assignment shows a structure of business plan. The task is to write a business plane about a Diet Shop.

  Identify the purposes of different types of organisations

Identify the purposes of different types of organisations.

  Entrepreneur case study for analysis

Entrepreneur Case Study for Analysis. Analyze Robin Wolaner's suitability to be an entrepreneur

  Forecasting and business analysis

This problem requires you to apply your cross-sectional analysis skills to a real cross-sectional data set with the goal of answering a specific research question.

  Educational instructional leadership

Prepare a major handout on the key principles of instructional leadership

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd