Question 8.P.11: A public works project is proposed that has total present-wo......
A public works project is proposed that has total present-worth benefits of $75 million and total present-worth costs of $55 million. In deliberating this proposal, some members of the town council have suggested that the project has a total present-worth disbenefit of $15 million; other members feel the $15 million should be treated as a cost. How should the proposal be evaluated?
In this particular case, it makes very little difference whether the $15 million is classified as a disbenefit or as a cost. If the $15 million is treated as a disbenefit,
BCR = \frac{\$75 – \$15}{\$55} = 1.09
If it is treated as a cost,
BCR = \frac{\$75}{\$55 + \$15} = 1.07
However, to eliminate any confusion, (8.7) should be used:
NBV = B – D – C (8.7)
NBV = $75 – $15 – $55 = $5 million
Since NBV > 0, the project is economically acceptable.