Question

A municipal government is considering the construction of a new county stadium in its city, and three alternatives have been selected for comparison:

B1: Consists of the construction of a football stadium and the use of the existing stadium for baseball games.

B2: Considers the construction of a multi-purpose stadium for both football and baseball games.

B3: Requires the construction of a stadium for football and a stadium for baseball.

The total construction costs are $16 million, $23 million, and $14 million, respectively, for alternatives B1, B2, and B3. The relevant costs and benefits of these alternatives are shown below.

B2 Revenue to the city from ticket sales outside the city Image and other intangible benefits Maintenance costs Increase in hotel revenues from fans living outside the city Loss in property values due to increased traffic ALTERNATIVES B1 B3 $900,000 $1,000,000 $600,000 $300,000 $500,000 $300,000 $300,000 $350,000 $400,000 $380,000 $850,000 $840,000 $90,000 $270,000 $410,000

Expected life for Alternative B1 is 30 years, for Alternative B2 is 35 years, for Alternative B3 is 35 years

If a 8% interest rate is used and using benefit-cost analysis from the city’s point of view, which of the three proposed alternatives should be selected?

Solve step step

Do not use excel

hurry up please

Answer 1

Alternative B1

Benefit-Cost ratio = Annual worth of benefits/ Annual worth of cost

Benefit-Cost ratio = (900000 + 300000 + 380000) / [16000000(A/P,8,30) + 300000 + 90000)

Using DCIF tables

Benefit-Cost ratio = 1580000 / 1540800

Benefit-Cost ratio = 1.025

Alternative B2

Benefit-Cost ratio = Annual worth of benefits/ Annual worth of cost

Benefit-Cost ratio = (1000000 + 500000 + 850000) / [23000000(A/P,8,35) + 350000 + 270000)

Using DCIF tables

Benefit-Cost ratio = 2350000/ 2593400

Benefit-Cost ratio = 0.91

Alternative B3

Benefit-Cost ratio = Annual worth of benefits/ Annual worth of cost

Benefit-Cost ratio = (600000 + 300000 + 840000) / [14000000(A/P,8,35) + 400000 + 410000)

Using DCIF tables

Benefit-Cost ratio = 1740000/ 2011200

Benefit-Cost ratio = 0.87

Alternative B1 to be selected as the Benefit-Cost ratio is greater than 1