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The Santa Clara River in Californias Ventura County floods frequently, in part because the banks...

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Accounting

The Santa Clara River in Californias Ventura County floods frequently, in part because the banks of the river lack water absorbing vegetation. Because of this flooding, the 1,000 homeowners with houses near the river must buy high-risk flood insurance. The flood insurance costs each of these homeowners $150 per year.

The County is considering implementing a new flood control plan. The plan would involve planting trees and other vegetation around the river to create natural flood control. Creating this natural flood control buffer would cost each of the 1,000 homeowners a fee of $150, to be paid immediately. The flood control benefits wont begin until one year has passed. After one year has passed, each property owner will begin to save $20 per year on their annual flood insurance premiums. The $20 savings per year will last forever.

Consider the present discounted value of the costs and benefits of this program to homeowners. Will homeowners approve of this project if the interest rate on investments is 10%? 5%? Show all of your work for full credit.

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