Question

266 Chapter 8 Benefit-Cost Ratio and Other Analysis Technic 8-19 The provincial highway department is analyz- ing the reconstruction of a mountain road. The vehicle traffic increases each year; hence the benefits to the motoring public also increase. Based on a traffic count, the benefits are pro- jected as follows: Year End-of-Year Benefit 2016 2017 2018 2019 2020 2021 $10,000 12,000 14,000 16,000 18,000 20,000 and so on, increasing $2,000 per year The reconstructed pavement will cost! $275,000 when it is installed and will have a 15-year useful life. The construction period is short; hence a beginning-of-year recon- struction will result in the listed end-of-year benefits. Assume a 6% interest rate. The re- construction, if done at all, must be done no later than 2021. Should it be done, and if so, in what year?

Answer 1

Reconstruction of pavement should be started in 2020 as Reconstruction cost will be $275000 and interest rate will be 6% so interest rate for 1st year will be 16500, end of year benefit in 2020 is 18000 which is more than interest cost for viability of the project. BCA for the project is more than 1 if construction start in 2020 and the same have useful life of 15 years. Realisation after interest component will be more than $275000 in 15 years considering interest @ 6% and realisation increasing $2000 per year and so on.