Answer to Question #241547 in Finance for DIVINITY

Question

A flood control district can construct several alternative control works to alleviate

flooding. These alternatives include the construction of dam A, dam B, and a system of

levees C. Each of these works can be built to function alone or together with any other or

all other projects. Thus we have a possibility of the following combinations: ABC, A, B,

C, AB, AC, and BC. The life of each dam is 80 years and the life of the levee system is

60 years. The cost of capital is 4%. Information on total investment, operation and

maintenance costs, and average annual flood damages is given in the table. Which flood

control undertaking is the most economical using incremental cost-benefit analysis?

Answer 1

ABC seems to be more economical since the combination may take a single initiative on other measures. Considering the fact that they are all combined, the initiative may call for a stronger control machines. However, the equipment may be cheaper compared to when the company purchases a single one for each one.