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CVC supplies power to the city of Cali in Columbia, South America. They are planning...

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Finance

CVC supplies power to the city of Cali in Columbia, South America. They are planning to build a dam to meet the citys burgeoning power needs. The dam will cost $7.5 million up front to build and will begin producing electricity the following year. The production of electricity is valued at $900,000/yr and the dam will produce a constant value for 17 years at which time it must be closed due to siltation.

  1. If the real interest rate is 7%, what is the present value of the project? At 4%?

  1. What is the annuity stream equivalent of this present value? At 7%? At 10 %

3. CVC is contemplating subsidizing large-scale pine plantations by private landowners who own the surrounding denuded hillsides. Colombian hydrologists have estimated that an initial $1.5 million dollar subsidy at the time of building the dam increased the longevity of the project by 10 years. This will result in an extra 10 years of annual returns of 900,000/yr. What is the present value of this supplemental investment at 4% and 7%?

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