04 Jun Question A dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam
Question
A dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam
will generate electricity. The dam will have a useful life of 50 years, after which the reservoir
will be full of sediment and the dam will need to be removed. The following are the
characteristics of the dam:
Initial cost: $100,000,000
Electricity purchased: 100,000 Mwh per year, @ $100/Mwh.
Cost of decommissioning dam: $10,000,000
Value of recreation lost: $5,000,000 per year.
a. If the social discount rate is 3% per year, is the dam a good idea?
b. If the social discount rate is 10% per year, is the dam a good idea?
c..Calculate the “cutoff” discount rate, c, such that the dam is a good idea for discount rates and a bad idea for discount rates >c.
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