ECO - A dam is proposed on a stretch of wild river

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.