Two plans have been proposed for a high-speed passenger rail line between Phoeni

Question

Two plans have been proposed for a high-speed passenger rail line between Phoenix and Tucson. The plans arc summarized in Table 3. Costs and benefits arc in millions of dollars. Use incremental benefit-cost ratio analysis with an interest rate of 10% to determine which, if cither, of the plans should be accepted. Don't forget to consider the Do-nothing option. You may w ant to consider using EXCEL to solve this problem. If you do use EXCEL please ensure that you upload to Blackboard before the due date: Refer to instructions on the front page.

Explanation / Answer

Incremental cost ratio is done by calculating the value of cost and benefits at its present value.

ALternative A

PV of all benefits:

=15(1.1)-30 + 28(1-1.1-30) / 0.1

=264.813

PV of all cost:

= 210+5(1-1.1-30) / 0.1

=257.134

Alternative B:

PV of all benefits:

=12(1.1)-15 + 22(1-1.1-15) / 0.1

=170.206

PV of all cost:

= 165+3(1-1.1-15) / 0.1

=187.818

Incremental B/C ratio:

= (264.813-170.206) / (257.134-187.818)

=1.364

Since incremental benefit cost ratio of A to B is greater than 1, this shows alternative A is better than alternative B.

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