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A dam is proposed on a stretch of wild river, a river that is currently used...

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 its reservoir will be full of sediment and the dam will need to be removed. The following are the characteristics of the dam:

Initial (year 0) cost: $100,000,000

Electricity produced: 100,000 MWh per year valued at $100 per MWh.

Cost of decommissioning the 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? (explain your work)

b) If the social discount rate is 10% per year, is the dam a good idea? (explain your work)

c) Calculate the cut-off discount rate, (c) , such that the dam is a good idea for discount rates less than (c) and a bad idea for discount rates bigger than c. Hint: use goalseek in Excel!

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