Compute the annual equivalent cost of the levee

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Reference no: EM131200448

After a factory has been built near a stream, it is learned that the stream occasionally overflows its banks. A hydrologic study indicates that the probability of flooding is about 1 in 8 in any one year. A flood would cause about $20,000 in damage to the factory. A levee can be constructed to prevent flood damage. Its cost will be $54,000 and its useful life is thirty years. Money can be borrowed at 8% interest. If the annual equivalent cost of the levee is less than the annual expectation of flood damage, the levee should be built. The annual expectation of flood damage is (1/8)x 20,000 = $2,500. Compute the annual equivalent cost of the levee.

a) $1,261

b) $1,800

c) $4,320

d) $4,800

Reference no: EM131200448

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