Assume that the costs and benefits associated with a proposed government project are as follows:
Year Benefits (R millions) Costs (R millions) 0 (Now) 200 500 End of Year 1 500 500 End of Year 2 1500 500 End of Year 3 800 200
(a) If the discount rate is 5 percent, calculate the present value of the net benefits for this project (show your work).
(b) Not all of the benefits associated with this project are easily quantifiable in Rand terms. What can be done to account for these factors?
(c) Detail the limitations associated with cost -benefit analysis.
Assume that the costs and benefits associated with a proposed government project are as follows:
| Year | Benefits (R millions) | Costs (R millions) |
| 0 (Now) | 200 | 500 |
| End of Year 1 | 500 | 500 |
| End of Year 2 | 1500 | 500 |
| End of Year 3 | 800 | 200 |
(a) If the discount rate is 5 percent, calculate the present value of the net benefits for this project (show your work).
(b) Not all of the benefits associated with this project are easily quantifiable in Rand terms. What can be done to account for these factors?
(c) Detail the limitations associated with cost -benefit analysis.
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1.(18 points) A public school district is investigating whether to purchase a new school bus to take over the rural-most route in the district. They have two options:
A modern, eco-friendly bus complete with seat belts and air conditioning, will have a first cost of $104,000, cost savings (in terms of fuel efficiency and maintenance costs) of $20,000/year the first year, and decreasing by $800 per year thereafter (so $19,200 the second year, $18,400 the third year, etcâ¦). Itâs estimated that the salvage value will be $8,000 at the end of its 12 year life.
A more basic bus will have a first cost $72,000 and cost savings of $12,800 per year. It is estimated that the salvage value will be $5000 at the end of its 12-year life.
Assume that the school district also has the option to stay with their current fleet (so the do nothing option is also available), and the MARR is 5%.
a. Use Benefits to Costs analysis to determine which of the options, if any, would be most economical for the school district.
b.Suppose the modern (more expensive) bus can be purchased for $99,000. How does this affect the Benefits to Costs analysis? Does this change your decision from part âaâ, or further reinforce it?
c. At what first cost of the modern (more expensive) bus are the two alternatives in this example equally desirable?
| Data for #4 part (c) | Modern | Basic |
| Cost | X | $70,000 |
| Uniform annual benefit | $20,000 in year 1, decreasing by $800/year thereafter | $14,000 in year 1, decreasing by $500/year thereafter |
| Salvage value | $8000 | $5000 |
d.In this problem only the economic consequences were evaluated. Do you think this type of decision is only economic, or are there other factors that could/would/should be considered? Briefly discussâ¦
