Bay Point is a midsized coastal New England town. Two years ago, a major flood destroyed the town's sewage treatment plant, which was located near the harbor. Estimates suggest that it will cost the town $18 million to rebuild the treatment plant. Since Bay Point does not have this kind of money on hand (and it was self-insuring the plant), the town will have to finance the project through a 30-year bond issue. The resulting revenues will pay for the plant, but the accompanying debt service will increase the town's annual operating budget for the next three decades.

As the town considered various rebuilding options, some officials and residents argued that the plant should be moved to a different site, farther from the harbor. This would require purchasing a new property, which in turn would add about 10 percent to the total cost of rebuilding. Moving the plant inland, moreover, would require reworking the network of underground feeder pipes. This would involve tearing up streets and seriously disrupting summer tourism—a major industry for the town—which would likely result in economic losses. Given all of the costs associated with moving the plant inland, local public officials decide to rebuild at the old location. Their reasoning: a major flood like this only happens once every 100 years, right?