A township is considering making upgrades to a gravel road, including repairing some washed out sections, widening the road, adding culverts, and filling ditches. The cost of the upgrade will be $40,000. Annual costs to maintain the road will be $4000. Annual benefits to the users of the road are estimated to be $9500 per year, primarily based on reduction in incidents/accidents, and also vehicle general wear-and-tear costs.
a. What is the benefits-to-cost ratio of the road improvement option described above, assuming a MARR of 4% and a project horizon of 30 years?
b. Some of the town board members are suggesting that paving the road would be a better option than that discussed in part “a”. The cost of this project is estimated to be $150,000. Annual costs to maintain the road in this case are estimated to be $1500/year. Annual benefits to the users of the paved road due to reduction in incidents/accidents, and also vehicle general wear-and-tear costs are estimated to be $20,000 per year. Using the same MARR and time horizon as in part “a”, use benefits to costs analysis to determine whether it’s worth the additional investment to pave the road. What is your final decision, based on B/C analysis?
c. In this problem there was no salvage value- had there been one (i.e., if we’d instead analyzed equipment that could be sold at the end of the project life), how would’ve you handled it? Describe specifically how it would’ve changed your B/C equation.
d. What is the breakeven point in terms of initial cost of paving the road, when your decision as to whether go with the gravel option or paved option changes?
e. Calculate the payback period for the two options (gravel vs. paved) using the information from parts “a” and “b”. What is your decision, based on payback period? Do the results concur with part C? In economic analysis is it possible for the payback period analysis to have different results from B/C analysis? Which analysis method would you recommend? Why?