Mena would like to build a dam in the Grand Canyon of Western US to provide electricity to the nearby urban area of Las Vegas. Suppose the dam costs $800 million to build and is expected to generate $150 million of annual electricity production forever. The annual discount rate is 5%. There is the possibility of environmental damage from flooding the Canyon. In fact, there is a 50% chance that the environmental damages from building the dam will be as high as $100 million per year and a 50% chance that there will be no damages from building the dam.
a. Without taking into account the expected environmental damage, is the dam a good idea?
b. Taking into account the expected environmental damage, is the dam a good idea (assuming we build it today)?