Project #5507 - Cost Benefit Analysis

Practice Exam Question 1: Cost-Benefit Analysis

 

You have been hired as a consultant for a town. Transportation experts have proposed 6 alternatives, and the has asked you to analyze their projections and help choose the best project. Each alternative incurs costs immediately, and construction is immediate. The schedule of costs and benefits for each alternative is displayed below. The current interest rate is 5%.

 

 

The board has asked you to weigh in on the following questions. They have

asked for a succinct report and they are interested in seeing the calculations behind your answers.

1. Using cost benefit analysis, which alternative should be chosen? Why?

2. One board member previously worked in private industry, and his company

used the “Payback Period” method as their algorithm when choosing between

alternatives. This method chooses the project with the shortest payback time for the

initial costs to be “made up.” Why is cost-benefit analysis superior to the payback period

method – or do they chose the same alternatives as a rule?

3. One council member notes that option 3 results in more pedestrian lives saved and is

therefore superior on ethical grounds. What is your response?

4. At the last minute, one alternative is added. It has an initial (year 0) cost of $90

and has annual, perpetual benefits of $5 starting in year 1. The board members are

excited by the prospect of perpetual benefits. How does this option compare to the

others?

5. Imagine only options 4 and 5 in the chart above are available. Analysts think that

interest rates will not stay at 5% and think that they could change tomorrow to either 2%

or 7%. How does that impact your decision in choosing between these alternatives?

Explain why the interest rate matters in the choice between projects 4 and 5?

 

Subject Mathematics
Due By (Pacific Time) 05/04/2013 12:00 pm
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