Search for question
Question

4. The initial cost of constructing a small dam that is expected to be operational for 100 years isP425 million. The annual net benefits will depend on the amount of

rainfall: P18 million in a"dry" year, P29 million in a “wet" year, and P52 million in a "flood" year. Meteorological records indicate that over the last 100 years, there have been 86 “dry" years, 12 "weť" years,and 2 "flood" years. Thus, this meteorological data can be used as probability weights to estimate the annual net benefits of the dam. Assume the annual benefits, measured in real pesos, begin to accrue at the end of the first year. Using sensitivity analysis of varying discount rates starting at 7% then subtracting 1% with each succeeding scenario, what is the maximum-discount rate at which the project will yield a positive net benefit?

Fig: 1