Question

The city engineer and economic development directors are evaluating two sites for construction of a multipurpose sports arena. The sites are downtown (DT) and southwest (SW) of the metropolitan area. The city already owns enough land at the DT site; however, the land for a parking garage will cost $1 million, and construction costs will be $12 million for the parking garage, infrastructure relocation, and drainage. The SW site is 30 km from downtown, but the land will be donated by a developer who knows that an arena at this site will dramatically increase the value of the remainder of his land holdings. Because of its centralized location, there will be greater attendance at most of the events held at the DT site. This will result in more revenue to vendors and local merchants in the amount of $400,000 per year. Additionally, the average attendee will not have to travel as far, resulting in annual benefits of $400,000 per year. All other costs and revenues are expected to be the same at either site. If the city uses a discount rate of 5% per year, and will construct at one site or the other, which site should be selected? Use a 30-year study period. The AB/C ratio is Select site (Click to select) (Click to select) downtown est politian area SO

Answer 1

Solution: Girn Parking garage cost = $1 million Construction cost = $12 million sw site = 30 km revenue to vendors = 8400,000/year annual benefite = $ 400, Ovol year discount rate = 51.1 year Study period = 3 years ABC ratio is: Total cost = 1+ 12 =$13million for dowrrlown Site, (400000 + 400000) (1-brzo pr of tolal benefitf = 6.05) = (800000) (0.7685) = (900000) (15.37) = (8 12296000

Benefit Cost ratio = 19296000/13000000 = 0.9458 -0.94 since, benefit Cost ratio of downtown site is lower than I', then southwest site should be selected.