Question

(NOTE: ENTER YOUR ANSWER ROUNDED TO TWO DECIMAL PLACES, for instance as 2.56, not as 2.564321. Include negative sign in front of your answer if negative. Do not round intermediate calculations!) A public project consisting of a construction of an outdoor public ice rink in a public park is being considered. The project would require an initial construction cost of $1.5 million and subsequent maintenance with an estimated annual cost of $69000. The project is assumed to last 19 years. After the project is over, the facility and land will be sold to a private entertainment company for an estimated $301000. The annual benefits to the public in terms of entertainment, improved fitness, and a lower teenage crime rate are quantified at an estimated $264000 per year. Assuming 7% cost of capital calculate the MODIFIED B-C ratio of the project. Be careful to use the correct formula for computing a modified B-C ratio Answer O RSA

Answer 1

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Answer:

We know the formula for difference between benefit and cost ratio as

Benefit – cost ratio = PV of cash benefits / PV of cost

=> Annual cash inflows =  Benefits flowing yearly – Costs annually = $264000 - $69000 = $195000

PV factor Annual cash inflow Salvage value Total present value of cash inflows 195000 301000 10.3356 0.27651 2015442 83230 $2098672

=> Benefit - cost ratio = $2098672/ $1500000 = 1.40