Choice and Cost Benefit Analysis > Present Value

Constructing a Dam

A state government is considering building a dam to provide water for irrigation. The dam would cost $25 million to build which would be paid in five payments of $5 million each. The first payment would be made immediately and the remaining payments would come at the end of each of the next four years. Once constructed, the dam would take a year to fill and would begin producing benefits at the end of the fifth year. The benefits would be $3 million per year and would go on forever. What is the present value of the dam if the interest rate is 5%?

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 08/17/2016