A school is overcrowded and there are three options. The do-nothing alternative corresponds to continuing to use modular classrooms. The school can be expanded, or a new school can be built to "split the load" between the schools. User benefits come from improvements in school performance for the expanded or new schools. If a new school is built, there are more benefits because more students will be able to walk to school, the average distance for those who ride the school buses will be shorter, and the schools will be smaller and more "student friendly." The disbenefits for the expanded school are due to the impact of the construction process during the school year. The interest rate is 8%, and the life of each alternative is 20 years. Which alternative should be chosen? What is the incremental ratio for the preferred alternative? Alternative User benefits ($M/yr) User disbenefits ($M) First cost ($M) Operations and maintenance ($M/yr) (a) Use the benefit-cost ratio. (b) Use the modified benefit-cost ratio. Expand 2.1 0.8 8.8 0.95 New School 3.1 0 10.4 1.7 (c) Use the public/government version of the B/C ratio. (d) Assume these numbers apply to a private firm and use a present worth index. (e) Are your recommendations for (a) through (d) consistent? Which measure gives the largest value? Why?
A school is overcrowded and there are three options. The do-nothing alternative corresponds to continuing to use modular classrooms. The school can be expanded, or a new school can be built to "split the load" between the schools. User benefits come from improvements in school performance for the expanded or new schools. If a new school is built, there are more benefits because more students will be able to walk to school, the average distance for those who ride the school buses will be shorter, and the schools will be smaller and more "student friendly." The disbenefits for the expanded school are due to the impact of the construction process during the school year. The interest rate is 8%, and the life of each alternative is 20 years. Which alternative should be chosen? What is the incremental ratio for the preferred alternative? Alternative User benefits ($M/yr) User disbenefits ($M) First cost ($M) Operations and maintenance ($M/yr) (a) Use the benefit-cost ratio. (b) Use the modified benefit-cost ratio. Expand 2.1 0.8 8.8 0.95 New School 3.1 0 10.4 1.7 (c) Use the public/government version of the B/C ratio. (d) Assume these numbers apply to a private firm and use a present worth index. (e) Are your recommendations for (a) through (d) consistent? Which measure gives the largest value? Why?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A school is overcrowded and there are three options. The do-nothing alternative corresponds
to continuing to use modular classrooms. The school can be expanded, or a new school can be
built to "split the load" between the schools. User benefits come from improvements in school
performance for the expanded or new schools. If a new school is built, there are more benefits
because more students will be able to walk to school, the average distance for those who ride
the school buses will be shorter, and the schools will be smaller and more "student friendly."
The disbenefits for the expanded school are due to the impact of the construction process
during the school year. The interest rate is 8%, and the life of each alternative is 20 years.
Which alternative should be chosen? What is the incremental ratio for the preferred
alternative?
Alternative
User benefits ($M/yr)
User disbenefits ($M)
First cost ($M)
Operations and maintenance ($M/yr)
(a) Use the benefit-cost ratio.
(b) Use the modified benefit-cost ratio.
Expand
2.1
0.8
8.8
0.95
New School
3.1
0
10.4
1.7
(c) Use the public/government version of the B/C ratio.
(d) Assume these numbers apply to a private firm and use a present worth index.
(e) Are your recommendations for (a) through (d) consistent? Which measure gives the largest
value? Why?
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