Question 10.5: Added Benefit versus Reduced Cost in a Bridge Widening Proje...
Added Benefit versus Reduced Cost in a Bridge Widening Project
A project is being considered by the Tennessee Department of Transportation to replace an aging bridge across the Cumberland River on a state highway. The existing two-lane bridge is expensive to maintain and creates a traffic bottleneck because the state highway is four lanes wide on either side of the bridge. The new bridge can be constructed at a cost of $300,000, and estimated annual maintenance costs are $10,000. The existing bridge has annual maintenance costs of $18,500. The annual benefit of the new four-lane bridge to motorists, due to the removal of the traffic bottleneck, has been estimated to be $25,000. Conduct a B–C analysis, using a MARR of 8% and a study period of 25 years, to determine whether the new bridge should be constructed.
Treating the reduction in annual maintenance costs as a reduced cost:
B–C = $25,000/[$300,000(A/P, 8%, 25) − ($18,500 − $10,000)]
B–C = 1.275 > 1; construct new bridge.
Treating the reduction in annual maintenance costs as an increased benefit:
B–C = [$25,000 + ($18,500 − $10,000)]/[$300,000(A/P, 8%, 25)]
B–C = 1.192 > 1; construct new bridge.
Therefore, the decision to classify a cash-flow item as an additional benefit or as a reduced cost will affect the magnitude of the calculated B–C ratio, but it will have no effect on project acceptability.