The livelihoods of local communities can be affected by environmental degradation and economic development resulting from the construction of hydropower projects, and failure to address issues of concern in a timely fashion can lead to conflicts. Working with communities to identify potential impacts, issues of concern, and community preferences for mitigation activities will help hydropower companies to plan and manage effective mitigation activities and avoid conflict. In this study, the preferences of the local community in the area affected by a four-megawatt hydropower project in Sankhuwasabha District in Nepal were measured using a discrete choice experiment survey. More than half of the respondents expected both positive (mostly economic) and negative (mostly environmental) impacts from the project. They were mostly concerned about the negative impacts that directly influenced their livelihood options, especially reduction in fish numbers and increased flooding. The analysis indicated that respondents wanted to have more fish available in the river, additional check dams to control floods, more funds allocated to conservation than to income generation, and less labour contribution. The estimated annual willingness-to-pay for the improved scenario was slightly more than the estimated cost of mitigating the physical and biological damage.