512 ECONOMIC ANALYSIS IN THE PUBLIC SECTOR
I
- which alternative should be recommended. Assume
that projec~ life is 45 years andi=6%.
16-17 The federal government proposes to construct a mul-
tipurpose water project to provide water for irriga-
tion and municipal use. In addition, flood control and
recreation benefits will be realized. The estimated
benefits of the project computed for 10 year periods
for the next 50 years are given in Table P16-17. The
annual benefits may be assumed to be one-tenth of
the decade benefits. The operation and maintenance
cost of the project is estimated to be $15,000 per year.
Assume a 50-year analysis period with no net project
salvage value.
(a)If an interest rate of 5% is used, and a benefit-
cost ratio of unity, what capital expenditure can
be justified to build the water project now?
(b)If the interest rate is changed to 8%, how does
this change the justified capital expenditure?16-18 The city engineer has prepared two plans for the con-
struction and maintenance of roads in the city park.
Both plans are designed to provide the anticipated
road and road maintenance requirements for the next
40 years. The minimum attractive rate of returri used
by the city is 7%.
PlanA is a three-stage development program:
$300,000 is to be spent immediately, followed by
$250,000 at the end of 15 years and $300,000 at the
end of 30 years. Maintenance will be $75,000 per
year for the first 15 years, $125,000 per year for the
next 15 years, and $250,000 per year for the final
10 years.
Plan B is a two-stage program: $450,000 is
required immediately (including money for special
equipment), followed by $50,000 at the end of
15 years. Maintenance will be $100,000 per year for
the first 15 years and $125,000 for each of the subse-
quent years. At the end of 40 years, it is believed that
the equipment can be sold for $150,000.
(a) Use a conventional benefit-cost ratio analysis to
determine which plan should be chosen.
(b)If you favored PlanB, what value of MARR.
would you use in the computations? Explain.
16-19 The state is considering eliminating a railroad grade
crossing by building an overpass. The new Structure,
together with the needed land, would cost $1.8 mil-
lion. The analysis period is assumed to be 30 years
based on the projection that either the railroad or the
highway above it will be relocated by then. Salvage
value of the bridge (actually, the net value of the land
on either side of the railroad tracks) 30 years hence is
estimated to be $100,000. A 6% interest rate is to be
used.
At present, about 1000 vehicles per day are de-
layed by trains at the grade crossing. Trucks repre-
sent 40%, and 60% are other vehicles. Time for truck
drivers is valued at $18 per hour and for other drivers
at $5 per hour. Average time saving per vehicle will
be 2 minutes if the overpass is built. No time saving
occurs for the railroad.
The installation will save the railroad an annual
expehse of $48,000 now spent f-or crossing guards.
During the preceding 10-year period, the rli}.lroadhas
paid out $600,000 in settling lawsuits and awident
cases related to the grade crossing. The proposedThe High The Low
Road Road
Averageconstruction cost $200,000 $450,000
per mile
Number of miles required^3510
Annual benefit per car per $0.015 $0.045
mile
Annual O&M costs per mile $2000 $10,000TABLEP16-17 Data
DecadesPurpose First Second Third Fourth FifthMunicipal $ 40,000 $ 50,000 $ 60,000 $ 70,000 $110,000
Irrigation 350,000 370,000 370,000 360,000 350,000
Flood control 150,000 150,000 150,000 150,000 150,000
Recreation 60,000- 70,000 80,000 80,000 - 90,000
Totals $600,000 $640,000 $660,000 $660,000 $700,000