A state legislature has appropriated $15 million to purchase and prepare the property for several new state parks. Alternatives have been suggested and forecasts for acquisition, preparation and annual operating costs have been estimated and listed below for each alternative. Also listed are the forecasted annual benefits to the community in dollars.
The planning time horizon should consider the acquisition and preparation as being done in the current year and then for 20 years thereafter. The value of the park at the end of the 20 year time horizon (salvage value) can be ignored. (all numbers are in millions of dollars) Use an annual discount rate of 7% in the evaluation. Any funds left in the budget after the acquisition and preparation phase can be used for additional enhancements to the parks. The sentence "The planning time horizon should consider the acquisition and preparation as being done in the current year and then for 20 years thereafter" is intended to mean that the acquisition and preparation will take one year - that is, the current year. Then use a 20 year planning horizon beyond that.
a Using a B-C method for evaluations, determine which ones should be chosen Explain your recommendation.
b Using a B/C method for evaluations, determine which ones should be chosen Explain your recommendation.
| Site |
Acquisition Cost |
Preparation Cost |
Annual Operating Cost |
Annual Benefits |
| 1 |
$1.0 |
$3.2 |
$1.0 |
$3.0 |
| 2 |
$2.2 |
$2.3 |
$1.2 |
$2.5 |
| 3 |
$1.4 |
$0.8 |
$0.9 |
$2.0 |
| 4 |
$0.9 |
$0.7 |
$1.4 |
$3.2 |
| 5 |
$3.4 |
$3.1 |
$1.0 |
$1.0 |
| 6 |
$2.6 |
$1.4 |
$0.9 |
$1.4 |
| 7 |
$1.4 |
$1.6 |
$1.3 |
$1.5 |