After a factory has been built near a stream, it is learned that the stream
occasionally overflows its banks. A hydrologic study indicates that the
probability of flooding is about 1 in 8 in any one year. A flood would cause
about \(\$ 20,000\) in damage to the factory. A levee can be constructed to
prevent flood damage. Its cost will be \(\$ 54,000\) and its useful life is 30
years. Money can be borrowed at 8 percent interest. If the annual equivalent
cost of the levee is less than the annual expectation of flood damage, the
levee should be built. The annual expectation of flood damage is (1/8)
\(\times\) \(20,000=\$ 2,500\). Compute the annual equivalent cost of the levee.
a) \(\$ 1,261\)
c) \(\$ 4,320\)
b) \(\$ 1,800\)
d) \(\$ 4,800\)