Question

Three mutually exclusive projects are being considered for a remote river valley: Project R, a recreational facility, has estimated benefits of $20 million and costs of $16 million; project F, a forest preserve with some recreational facilities, has estimated benefits of $26 million and costs of $20 million; project W, a wilderness area with restricted public access, has estimated benefits of $10 million and costs of $2 million. In addition, a road could be built for a cost of $8 million that would increase the benefits of project R by $16 million, increase the benefits of project F by $10 million, and reduce the benefits of project W by $2 million. Even in the absence of any of the other projects, the road has estimated benefits of $4 million.
A. Calculate the benefit-cost ratio and net benefits for each possible alternative to the status quo.
B. If only one of the seven alternatives can be selected, which should be selected according to the CBA decision rule?

Answer 1

Answer:

A) Project R = benefit / cost = 20 / 16 = 1.25

Project R with road = benefit / cost = 36 / 24 = 1.50

Project F = benefit / cost = 26 / 20 = 1.30

Project F with road = benefit / cost = 30 / 28 = 1.07

Project W = benefit / cost = 10 / 2 = 5.00

Project W with road = benefit / cost = 8 / 10 = 0.80

Road = benefit / cost = 2 / 8 = 0.25

B) Project W should be selected since its cost benefit ratio is higher than the rest of the alternatives.

Explanation:

The cost benefit ratio is a profitability ratio that helps investors to understand how much money an investment will yield. In case of project W, for each dollar invested, the project will yield $5.