Cost Benefit Analysis
Use the net present value methodology when creating a cost-benefit analysis to evaluate the following project:
The State of Massachusetts would like to replace a National Guard armory rapidly reaching the end of its service life. The Department of Military Affairs has been told that continued special maintenance would be $275,000 annually. Rehabilitation of facility would cost $4,000,000, and would extend the armory's service life by 15 years.
1. Calculate the discount factor for each year (use 4% discount rate @ 15 years)
2. Calculate the annual present value cost of maintenance (15 years)
3. Calculate the discounted benefit of rehabilitating the armory
4. Given the discounted cost of rehabilitation, what is the cost- benefit ratio for the proposal?
Be sure to include information regarding the following items when completing your evaluation of the project:
• the objectives of the project
• the demand and consumer surplus of the project
• a categorization of the project expenses
• an estimation of potential delays.