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Problem Set- Cost-benefit/effectiveness, Decision analysis

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1. Calculate the net benefit of the two projects in the table by evaluating them at 0, 5, 10 and 20 percent discount rates. 2. You are the Chief Aid to the City's Director of Transportation. You must help the Director select a project that will improve road congestion and safety. You gather information on many possible projects, and narrow your choice to four. In brief, they are A) Increasing highway capacity, B) Increasing highway safety, C) Increasing non-highway capacity, and D) Increasing non-highway safety. There are four relevant costs and benefits you need to consider: 1) the cos...

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Question Preview:

1. Calculate the net benefit of the two projects in the table by evaluating them at 0, 5, 10 and 20 percent discount rates. 2. You are the Chief Aid to the City's Director of Transportation. You must help the Director select a project that will improve road congestion and safety. You gather information on many possible projects, and narrow your choice to four. In brief, they are A) Increasing highway capacity, B) Increasing highway safety, C) Increasing non-highway capacity, and D) Increasing non-highway safety. There are four relevant costs and benefits you need to consider: 1) the cost of construction, 2) the cost of the additional traffic and congestion that will occur during construction, 3) the savings due to a reduction in motorist injuries, and 4) the savings due to less time spent in traffic. The cost and benefit estimates for each are shown in the table below. 3. In July, the parks and recreation department in your town wants to organize an exhibition of local arts and crafts. The department is considering whether to hold the exhibit inside the downtown sports arena or outside in its open-air parking lot. However, the problem is that while planning the location of the exhibition, the planners face uncertainly about the weather. The weather bureau reports that there is only a 20% change of rain. If the town holds the event inside the sports arena, after paying for the use of the facility, it expects to break even if it rains. If it does not rain, the town will make a profit of $15,000 from the event. One the other hand, if the exhibition is held outdoors, it can be either a great success or a real failure, depending on the weather. If it does not rain, the town will make a tidy profit of $35,000, but if it rains, it stands to lose $10,000. Draw a decision tree and explain the options open to the decision makers. What would be your recommendation?

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Evaluation of the project:

From the above computation, we got a net present value of inflow of each project at different discounting rates. While observing the each project without applying discounting rate we can find that the project B generate more earning while competing with the project A,  in such a situation it would be advisable to adopt the project B, as the sum of total benefit of said project is comparatively more than others, similar to this while analysis the project by applying the discounting rate 0 ,5 , 10  and 20 percent we can  project A is more alternative and profitable while competing with the project B. hence in order to take a sound and smart discussion it would be preferable to go with the discounting method, and it would be advisable to go with project B in.         

Reason for selection of project A.    The construction cost of the project A is $ 60 millions, and addition cost of construction would be $ 30, this amount to saving of $ 10 and $ 110 due to reduction in traffic time, sum of which total saving would be  $ 30 million which us comparably more then the other three project, keeping in mind the benefits or projected cash inflows, we can judge that project A is more beneficiary and suitable then other three project .     

 

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