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<br />All computations were made in terms of constant dollars. Hence, <br />only the real cost of capital should be represented in the interest rate <br />used. This interest rate includes no allowance for expected inflation. <br />Such a procedure allows the analyses to be made using prices that prevail <br />when the economic study is made. A more complete discussion of the <br />assumptions and limitations is included in Howe (1971). <br /> <br />In other words, while the going interest rate might be around 10 or <br />11 percent, the interest rate that should be used in these analyses <br />might be around 5 percent. Interest rates normally do include a perceived <br />inflation factor. By using this rate instead of the prevailing interest <br />rates, the economist does not have to apply inflation factors to replacement <br />costs that may not be incurred until some time in the future. All costs <br />can then be estimated at today's prices. <br /> <br />Determining just <br />scope of this report. <br />percent has been used <br /> <br />what the interest rate should be is beyond the <br />For illustrative purposes, an interest rate of 5 <br />throughout this report. <br /> <br />Risk Analysis <br /> <br />Definition <br /> <br />There are many risks or 'uncertainties attached to the development, <br />design, construction, and use of a project. In this report, an attempt <br />is made to quantify the risk associated with the damage to the embankment <br />when overtopped, damage caused by backwater, cost of traffic interruption <br />when the embankment is overtopped, and other quantifiable costs which <br />may be appropriate to the site. Even so, there is an uncertainty <br />associated with each item; for example, the traffic volumes may be <br />higher or lower than estimated. <br /> <br />To obtain the total expected damage, the relation between damage <br />and all possible floods which would cause damage is computed. A typical <br />computation is shown in table 1. The trapezoidal rule is used to compute <br />the increment of expected damage between each flood chosen for computing <br />damages. Risk is computed as the product of the exceedance probability <br />interval (column 13) and the average damage for interval (column 11). <br />The damages for floods larger than the largest flood (labeled ultimate <br />in table 1, the 0.2-percent-chance flood) are assumed to be the same as <br />those for the largest flood. The expected damage of the ,largest flood <br />is the damage of the largest flood multiplied by the exceedance probability <br />of the largest flood. <br /> <br />7 <br />