A tunnel through a mountain is being considered as a replacement for an existing stretch of highway in south-eastern Kentucky. The existing road is a steep, narrow, winding two-lane highway that has been the site of numerous fatal accidents, with an average of 2.05 fatalities and 3.35 “serious injuries” per year. It has been projected that the tunnel will significantly reduce the frequency of accidents, with estimates of not more than 0.15 fatalities and 0.35 “serious injuries” per year. Initial capital investment requirements, including land acquisition, tunnel excavation, lighting, roadbed preparation, etc., have been estimated to be $60,000,000. Annualized upkeep costs for the tunnel will be significantly less than for the existing highway, resulting in an annual savings of $105,000. For purposes of this analysis, a “value per life saved” of $1,000,000 will be applied, along with an estimate of $750,000 for medical costs, disability, etc., per “serious injury”. Apply the benefit-cost-ratio method, with an anticipated life of the tunnel project of 50 yr and an interest rate of 8% per year, to determine whether the tunnel should be constructed.
a. Not recommend constructing the tunnel
b. Recommend constructing the tunnel