Question 10.3: B−C Ratio of the Proposed Bypass In this example, we will ev...
B−C Ratio of the Proposed Bypass
In this example, we will evaluate the bypass described in the beginning of the chapter. The construction cost of the bypass is $20 million, and $500,000 would be required each year for annual maintenance. The annual benefits to the public have been estimated to be $2 million. If the study period is 50 years and the state’s interest rate is 8% per year, should the bypass be constructed? What impact does a social interest rate of 4% per year have on the B–C ratio of the project?
At an interest rate of 8% per year, the conventional B–C ratio of the proposed bypass is
B-C= \frac{\$2,000,000}{\$2,000,000(A/P, 8\%, 50) + \$500,000} = 0.94.
Because this ratio is less than one, the bypass is not economically acceptable at 8% interest.
If a social interest rate of 4% per year was used, the B–C ratio would be 1.40 and the bypass would be acceptable.