Deck 10: Evaluating Projects With the Benefitcost Ratio Method

Question 1

The initial cost of constructing a flood control dam is estimated to be $5 million, with annual upkeep costs of $340,000. Annual benefits e.g., reduced flood damage, agricultural development, and tourism, etc.) are expected to be $1.25 million, whereas the disbenefits from significant ecological and human social changes are expected to be $0.025 million per year. Assume the dam will have a useful life of 53 years. At an interest rate of 17% per year, should the dam be constructed on the basis of its conventional B- C ratio, with AW as the equivalent- worth measure?

Answer 1

Conventional B- C = 1.03 > 1; therefore construct the dam.

Question 2

A Chinese official is considering construction of a gondola lift system that transports visitors from the tops of the mountain peaks to the valley at one of the National Forest Parks in China. The lift system is expected to last for 20 years. Annual maintenance cost of
$260,000 and inspection and repaint costs of $45,000 every 5 years are expected. Annual benefits are estimated to be $420,000. If an interest rate of 17% per year and a B- C ratio of at least 2.5 are used, what is the maximum investment cost allowed for the lift system?

Answer 2

Initial cost = - $551,861.83

Question 3

Two renewal energy alternatives are available for providing energy at a remote federal research facility. The cash flow estimates associated with each alternative are given below. Use the conventional B- C ratio method, with AW as the equivalent- worth measure, to determine which alternative should be selected at an interest rate of 14% per year over a 25- year study period. One alternative must be selected.

Answer 3

OB I- II) = 1.85
OC
Select Alternative I.

Question 4

Duck Construction has proposed two alternatives for constructing a new bridge in Oregon. Based on data from recent bridge construction projects of comparable size, the estimated costs for each alternative are given below. Use the conventional B- C ratio method, with PW as the equivalent- worth measure, to determine which alternative should be selected at an interest rate of 9% per year. Assume a study period of 35 years.

Question 5

For flood control purposes, the government is considering three undeveloped sites for a water detention area. The estimated costs associated with each alternative are given below. Use the conventional B- C ratio method, with AW as the equivalent- worth measure, to determine which alternative should be selected at an interest rate of 6% per year. Assume the site will be used for 17 years before being developed for other purposes.

Question 6

The cost of building Runyang Bridge in China, the world's third longest suspension bridge, was approximately $5 million. The indefinite upkeep costs are estimated to be $250,000 per year. Annual benefits of $340,000 and annual disbenefits of $41,000 have also been identified. Using an interest rate of 17% per year, determine the conventional B- C ratio.

Question 7

As part of a broad effort to invigorate its pipeline and move more aggressively into biotechnology, a major pharmaceutical company plans to set up a new division dedicated to developing biotherapeutic drugs and research technologies. The company expects to pay $120 million for set up costs of its new division now and $6 million operating costs each year for the next 12 years. The company estimates that the new division will be able to generate annual revenue of $42 million beginning 7 years from now. What is the conventional B- C ratio for this investment if the company's minimum attractive rate of return is 14% per year and the project life is 12 years?

Question 8

Three independent projects are available for a secret government agency. The estimated costs associated with each alternative are given below. Use the conventional B- C ratio method to determine which alternatives), if any, should be selected at an interest rate of 7% per year. Assume a project life of 20 years and a B- C ratio of at least 1 for evaluation.

Question 9

Calculate the modified B- C ratio, with PW as the equivalent- worth measure, for the following cash flow estimates of a public project at an interest rate of 2% per year.

Question 10

Two alternatives have been proposed for a government project. The estimated costs associated with each alternative are given below. Use the modified B- C ratio method, with AW as the equivalent- worth measure, to determine which alternative should be selected at an interest rate of 3% per year.