Investment

A privately owned utility is considering two cash rebate programs to achieve water conservation. Program 1, which is expected to cost an average of $60 per household, would involve a rebate of 75% of the purchase and installation costs of an ultralow-ftush toilet. This program is projected to achieve a 5% reduction in overall household water use over a 5-year evaluation period. This will benefit the citizenry to the extent of $1 .25 per household per month. Program 2 would involve grass replacement with desert landscaping. This is expected to cost $500 per household, but it will result in reduced water cost at an estimated $8 per household per month (on average).

At a discount rate of 0.5% per month , which program, if either, should the utility undertake? Use the B/C method.

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The U.S. Bureau of Reclamation is considering a project to extend irrigation canals into a desert area. The initial cost of the project is expected to be $1.5 million, with annual maintenance costs of $25,000 per year. (a) If agricultural revenue is expected to be $175,000 per year, do a B/C analysis to determine whether the project should be undertaken, using a 20-year study period and a discount rate of 6% per year. (b) Rework the problem, using the modified B/C ratio.

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