El Paso Water (EPW) purchases surface water for treatment and distribution to EPW customers from the County Water Improvement District during the irrigation season. A new contract between the two entities resulted in a reduction in future price increases in the cost of the water from 8% per year to 4% per year for the next 20 years. The cost of water next year (which is year 1 of the new contract) will be $260 per acre-ft. Using an interest rate of 6% per year,
(a) Determine the present worth of the savings (in terms of $/acre-ft) to EPW between the old and the new contracts.
(b) Determine the total present worth of the savings over the life of the contract if EPW uses 51,000 acre-ft per year.
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