Week 2 hw Benefit-Cost Analysis of Dam Construction Projects

 

 

Corporations have to select among many projects that are under consideration by the management. Their

primary instrument for evaluating and selecting among the available projects is the benefit-cost analysis. In

this analysis, both the annual benefits and the annual costs deriving from a project are estimated in several

different categories. Then the total benefit is divided by the total cost to produce a benefit-cost ratio. This

ratio is then used by corporations to compare numerous projects under consideration. A benefit-cost

ratio greater than 1.0 indicates that the benefits are greater than the costs, and the higher a project’s

benefit-cost ratio, the more likely it is to be selected over projects with lower ratios.

Currently, the JET Corporation is evaluating two dam project constructions, one in southwest Georgia

(Dam #1) and the other in North Carolina (Dam #2). The company has identified six areas of benefits:

improved navigation, hydroelectric power, fish and wildlife, recreation, flood control, and the commercial

development of the area. Furthermore, there are three estimates available for each type benefit – a

minimum possible value, a most likely value (i.e., a mode or peak), and a maximum possible value. For the

costs, two categories associated with a construction project of this type have been identified: the total

capital cost, annualized over 30 years (at a rate specified by the creditors and the government), and the

annual operations and maintenance costs. These benefits and costs estimations for both dam projects (in

millions of dollars) are as follows: