a 20-year study 7.24 You work for the New Mexico Department of Transportation (NMDOT). Two proposals to im- prove street safety and lighting in a colonia in south central New Mexico have been proposed. (a) Use a B/C analysis and a discount rate of 8% per year to evaluate the proposals. (b) (Here is a thought ques- tion.) If you reevaluate proposal 1 benefits and find them to be understated by $100,000 per year, ben- efits will increase from $530,000 to $630,000 per year. Now, the evaluation (1 vs. DN) will have a B/C = 1.30. There are three questions: (1) What will be the time basis of the incremental evalua- tion? (2) Using the comparison terminology "larger initial cost" vs. "smaller initial cost," what will be the order of incremental comparison between the two proposals: (1 vs. 2) or (2 vs. 1)? (3) Which proposal will be selected now? Why?

Excel Applications for Accounting Principles
4th Edition
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Gaylord N. Smith
Chapter26: Capital Budgeting (capbud)
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a 20-year study
7.24 You work for the New Mexico Department of
Transportation (NMDOT). Two proposals to im-
prove street safety and lighting in a colonia in south
central New Mexico have been proposed. (a) Use a
B/C analysis and a discount rate of 8% per year to
evaluate the proposals. (b) (Here is a thought ques-
tion.) If you reevaluate proposal 1 benefits and find
them to be understated by $100,000 per year, ben-
efits will increase from $530,000 to $630,000 per
year. Now, the evaluation (1 vs. DN) will have a
B/C = 1.30. There are three questions: (1) What
will be the time basis of the incremental evalua-
tion? (2) Using the comparison terminology "larger
initial cost" vs. "smaller initial cost," what will be
the order of incremental comparison between the
two proposals: (1 vs. 2) or (2 vs. 1)? (3) Which
proposal will be selected now? Why?
Transcribed Image Text:a 20-year study 7.24 You work for the New Mexico Department of Transportation (NMDOT). Two proposals to im- prove street safety and lighting in a colonia in south central New Mexico have been proposed. (a) Use a B/C analysis and a discount rate of 8% per year to evaluate the proposals. (b) (Here is a thought ques- tion.) If you reevaluate proposal 1 benefits and find them to be understated by $100,000 per year, ben- efits will increase from $530,000 to $630,000 per year. Now, the evaluation (1 vs. DN) will have a B/C = 1.30. There are three questions: (1) What will be the time basis of the incremental evalua- tion? (2) Using the comparison terminology "larger initial cost" vs. "smaller initial cost," what will be the order of incremental comparison between the two proposals: (1 vs. 2) or (2 vs. 1)? (3) Which proposal will be selected now? Why?
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