Question

The Parks and Recreation Department of Burkett County estimates the initial cost of a river park to be $2,200,000, annual upkeep costs of $120,000, benefits of $300,000 per year, and disbenefits $43,000 per year have been identified. Using a discount rate of 0.04 per year, calculate the conventional B/C ratio.

Answer 1

Answer:

B/E ratio 1.2356

Explanation:

$B/E = \frac{PV \: cash-flow}{initial \: cost\: + operating \: cost \: PV}$

300,000 - 43,000 = 257,000

257,000/0.04 = 6,425,000

initial cost 2,200,000

unkeep cost 120,000/0.04 = 3,000,000

6,425,000/(2,200,000+3,000,000) = 1.235576923

Note we are given a discount rate, which means the upkeep, benefits and disbenefits are perpetual.