Cost-Benefit Analysis of a Beach
The Commonwealth of Massachusetts is considering buying a private beach on Cape Cod and opening it up to the public. The property will cost $1.8 million now. Over the course of the first year (“year 0”) further expenses of $2.2 million will be required, to develop a parking lot and improve the access road. Survey information indicates that in the summer months (June through August), 2,200 people would visit the beach on average each day, and would value their visits at $2.1 each. During the rest of the year there would be 550 visitors daily, each valuing the experience at $0.80.
Set up a cost-benefit analysis to determine whether the Commonwealth should undertake this project.
Assume that the relevant time horizon is 10 years (i.e. costs and benefits beyond 10 years are irrelevant). During year 0 visitors could not use the beach, while improvements are being undertaken, but they may use it during the subsequent ten years. The discount rate is 5%. [Hint: Set up the flow of costs and benefits on a spreadsheet, and compute the net present value.]