Hemisphere Corp. is considering a BOT contract to construct and operate a large dam with a hydroelectric power generation facility in a developing nation in the southern hemisphere. The initial cost of the dam is expected to be $30 million, and it is expected to cost $100,000 per year to operate and maintain. Benefits from flood control, agricultural development, tourism, etc., are expected to be $2.8 million per year.
At an interest rate of 8% per year, should the dam be constructed on the basis of its conventional B/C ratio? The dam is assumed to be a permanent asset for the country. (a) Solve by hand. (b) Using a spreadsheet, find the B/C ratio with only a single cell computation.
The B/C ratio for a new flood control project along the banks of the Mississippi River is required to be 1.3. If the benefit is estimated at $600,000 per year and the maintenance cost is expected to total $300,000 per year, what is the allowed maximum initial cost of the project? The discount rate is 7% per year, and a project life of 50 years is expected. Solve in two ways: (a) by hand and (b) using a spreadsheet set up for sensitivity analysis
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