PROBLEM 1:
Three mutually exclusive projects are being considered for a remote river valley: Project R, a recreational facility, has estimated benefits of $10 million and costs of $8 million; project F, a forest preserve with some recreational facilities, has estimated benefits of $13 million and costs of $10 million; project W, a wilderness area with restricted public access, has estimated benefits of $5 million and costs of $1 million. In addition, a road could be built for a cost of $4 million that would increase the benefits of project R by $8 million, increase the benefits of project F by $5 million, and reduce the benefits of project W by $1 million. Even in the absence of any of the other projects, the road has estimated benefits of $2 million.
- Calculate the benefit-cost ratio and net benefits for each possible alternative to the status quo. Note that there are seven possible alternatives to the status quo: R, F, and W, both with and without the road, and the road alone.
- If only one of the seven alternatives can be selected, which should be selected according to the CBA decision rule?