Question 8.7: A large city is located close to a major seaport. It has bee......
A large city is located close to a major seaport. It has been proposed that a new superhighway be built between the city and the seaport, running parallel to the present congested, two-lane highway. A group of consulting engineers has estimated that the new highway will provide the following direct benefits: (1) additional commerce between the city and the seaport, having a value of $50 million per year; (2) future economic growth within the region over a 10-year period, resulting in an increase of $5 million per year in commercial activity, beginning in the second year; (3) a reduction in highway accidents, resulting in a direct savings of approximately $0.8 million per year. On the other hand, the following disadvantages or disbenefits are associated with the new highway: (i) the destruction of valuable farmland that currently contributes $1.3 million per year to the regional economy; (ii) a decrease in commercial activity along the present highway, resulting in a loss of $0.7 million per year. Assess the desirability of the proposed superhighway, based on a construction cost of $280 million and a yearly maintenance cost of $1.5 million. Assume a lifetime of 30 years and an interest rate of 7%, compounded annually.
Over the entire 30-year period, the yearly net benefits, B – D, are given by the EUAS method as
B – D = $50 + $5(A/G, 7%, 10)(P/A, 7%, 10)(A/P, 7%, 30) + $0.8 – ($1.3 + $0.7)
= $60.0 million
Similarly, the yearly costs are given by
C = $280(A/P, 7%, 30) + $1.5 = $24.1 million
and the benefit-cost ratio is
BCR = \frac{\$60.0}{\$24.1} = 2.49Since BCR >1, the proposed highway is considered to be desirable.