Log in
Economics
1
answer
0
watching
101
views

1.1 The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever, a perpetuity) is $425 million. The annual net benefits will depend on the amount of rainfall: $18 million in a “dry” year, $29 million in a “wet” year, and $52 million in a “flood” year. Meteorological records indicate that over the last 100 years there have been 86 “dry” years, 12 “wet” years, and 2 “flood” years. Assume the annual benefits, measured in real dollars, begin to accrue at the end of the first year. Using the meteorological records as a basis for prediction, what are the net benefits of the dam if the real discount rate is 5 percent? Does the dam pass the net benefits test?

1.2 Use several alternative discount rate values (1% to 10%) to investigate the sensitivity of the present value of net benefits of the dam in 1.1 to the assumed value of the real discount rate. Determine the "breakeven" value of the discount rate, which can be found by solving for the rate at which the present value of the stream of expected annual net benefits just equals the cost of construction.

Watch
1
answer
0
watching
101
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Joshua Stredder
Joshua StredderLv10
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

A highway department is considering building a temporary bridge to cut travel time during the three years it will take to build a permanent bridge. The temporary bridge can be put up in a few weeks at a cost of $740,000. At the end of three years, it would be removed and the steel would be sold for scrap. The real net cost of this removal would be $81,000. Based on estimated time savings and wage rates, fuel savings, and reductions in risks of accidents, department analysts predict that the benefits in real dollars would be $275,000 during the first year, $295,000 during the second year, and $315,000 during the third year. Departmental regulations require the use of a real discount rate of 4 percent.

a. Calculate the present value of net benefits assuming that the benefits are realized at the end of each of the three years.

b. Calculate the present value of net benefits assuming that the benefits are realized at the beginning of each of the three years.

c. Calculate the present value of net benefits assuming that the benefits are realized in the middle of each of the three years.

d. Calculate the present value of net benefits assuming that half of each year's benefits are realized at the beginning of the year and the other half at the end of the year.

e. Does the temporary bridge pass the net benefits test?

1. Calculating the Net Present Value of Environmental Projects with Future Costs and Benefits

Bar-tailed godwits are birds that migrate between their (northern summer) nesting sites in Alaska non-stop all the way down to (southern summer) tidal estuaries in New Zealand . Ideal southern habitats are undisturbed muddy estuaries or lagoons.

Suppose that an estuary near Christchurch has seen a major drop in the number of migrating godwits, with the decline attributed to damage to the estuary caused by construction-related landfill after the earthquakes. A “Bring Back the Godwits” group forms, and petitions the local council to restore the estuary to its pre-quake condition (clearing landfill, and restoring plantings.) The group is asked by the council to prepare an estimate of the costs of restoration, and the benefits to those people in Christchurch who enjoy observing the in- and out-migration of the birds. (Benefits to the godwits themselves are ignored, since if they do not migrate to the estuary, they will likely migrate to other more remote locations in New Zealand.) The council asks the group to consider a 20 year time horizon (from year 0, 1, 2, …19, 20), and use an annual time discount rate of delta (δ) = .05 (i.e. 5%).

The group estimates that estuary restoration costs would be $30,000 in Year 0, $492,850 in Year 1, $300,000 in Year 2, and then an ongoing cost of $10,000 for each of Years 3-20. On the benefit side, based on a contingent valuation analysis of a representative sample of Christchurch residents, the group estimates aggregate benefits of restoration would be zero in Years 0 to 3, $40,000 in Years 4 to 5, and $100,000 for each of Years 6 to 20.

a. Based on the data collected by the group, calculate the net present value (NPV) of the estuary restoration to two decimal places. Would the estuary restoration be a potential Pareto improvement?

b. Given the timing of the costs and benefits of the project, would the estuary restoration be a potential Pareto improvement if the council required a higher discount rate be used? (You should not need to provide calculations to answer this question.)

Monetary Policy and Inflation: Use our standard Keynesian macroeconomic model:

• Y = E = C + I + NX + G — GDP equals the sum of consumption, investment, net exports, and government purchases
• C = c0 + cy x Y — consumption equals the consumer-confidence term plus the mpc times GDP or income
• I = I0 - Ir x r — business investment spending equals the business animal-spirits term minus the interest sensitivity of investment times the long-run real risky interest rate
• μ = 1/(1 - cy) — the multiplier is the inverse of one minus the mic
• Y = μ(c0 + I0 + NX) - (μ Ir) x r + μG — our summing-up equation, telling us how the level of annual GDP depends on the multiplier μ, on the private spending flows c0 + I0 + NX, on the
interest-sensitivity parameter Ir, on the interest rate r, and on government purchases G


For this problem, assume a value of the Keynesian multiplier of μ = 2, and with Ir, the sensitivity of investment spending I to the interest rate r, such that Ir = $0.15T. And let’s use the Greek letter Δ—capital delta—as a shorthand symbol for changes from the previous equilibrium situation.


The Federal Reserve controls the short-term safe interest rate on government securities—it can nail that value to whatever it wants by buying and selling bonds for cash. We call this interest rate i. But the interest rate that matters for determining investment spending is the long-term real risky interest rate at which banks lend to companies. We call this interest rate r.


a) Suppose that the interest rate r that matters for investment spending falls by 1.5%-pts:
Δr = -1.5
By how much would you expect investment spending to fall given the parameter values of our model? How large is ΔI?

b) Continue your analysis from (a): given the parameter values of our model and the boosting of investment spending you calculated in (a), by how much would you expect GDP Y to grow?


c) Annual real GDP in the mid-2000s was about $15T. How large is this boost to GDP ΔY you calculated in (b) as a percentage of the then-level of real GDP?


d) On average, a 1% extra boost to GDP is associated with a 1.5% extra decrease in the unemployment rate. By how much extra would you expect the unemployment rate to fall as a
result of the boost to GDP you calculated in (b) and (c)?


e) Suppose that with the interest rate decline the unemployment rate falls from 6% to 4.5%. What would the unemployment rate have been without this interest-rate decline?

f) Suppose that real GDP had been lower for each of three years by the amount you calculated in (b). How much poorer would Americans have been in terms of reduced income over those three years had the interest rate r not fallen?


g) In an America with about 135 million workers, how much is this lost income per worker?

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in