10212-10-28FPP

AID:1825 | 16/10/2013

Given information

Life span of the flood control dike is given as 15 years

Flood occurs every 5 years
Average damage is given as 600,000
MAAR is given as 12 percent per annum

Maximum investment
Maximum investment can be calculated using following formula:
When Benefit cost ratio is equal to 1, annual value of the two projects are equal. Annual
value of the project can be calculated using following formula:

Annual value Annual damage 1 i

1 i 1

(1)

Substitute the respective values in Equation (1), this is done below:

Annual value 600, 000 1 0.12
600, 000 1.12

2.5

2.5

0.12

1 0.12 1

0.12

1.12 5 1

0.12

1.76 1
0.12
600, 000 1.327

0.76
600, 000 1.327 0.1579
600, 000 1.327

125,719.98

Present value of the investment

Present value can be calculated using following formula:
1 i n 1
Present value Annual value

i 1 i n

(2)

Substitute the respective values in Equation (2), this is done below:

1 0.12 1
15
0.12 1 0.12

Present value 125,719.98

15

1.12 1
15
0.12 1.12

125,719.98

15

5.473 1

0.12 5.473
4.473
125,719.98

0.65676
125,719.98 6.8107
856,241.07
125,719.98

Present value of the investment is $856,241.07. Hence, option (c) is correct.