Re-compute benefit-cost ratio and outcome with previous case

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Reference no: EM13885713

An inland river system is in need of rehabilitation to reduce the salinity level in water and remove blue green algae. The rehabilitation scheme involves a program of surface and ground water seepage interception and treatment to remove salt and nutrients, as well as tree planting and other measures, costing around $60 million with an annual operating cost of $5 million over a 25 year period. If this scheme is not implemented it is estimated that the local agricultural production (worth $25 million currently) will suffer by 3% drop in production starting in the coming year (year 2 will be 6% loss, year 3 will be 9% loss and so on). If the rehabilitation proceeds it will make the river an attractive destination for vacationers. The development of vineyards will also follow. Overall, if the rehabilitation goes ahead, it will generate tourism and related activities (in addition to prevention of agricultural losses) worth $10 million in year 1, rising by 5% annually (year 2 will be 10.5, year 3 will be 11, year 4 will be 11.5 and so on). a. Determine if it is worthwhile to rehabilitate this river. The MARR is 6% per annum. b. To partially reduce the total cost of constructing and operating this facility it has been decided to charge the users and farmers, and collect from them an amount equal to 30% of the total benefits accruable to them under the above scheme. Re-compute the benefit-cost ratio and compare the outcome with the previous case. What is your recommendation?

Reference no: EM13885713

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