Eyup Municipality is considering opening a new light metro rail line. The new li

Question

Eyup Municipality is considering opening a new light metro rail line. The new line can be constructed at a cost of $9 M, and will have an estimated annual maintenance cost of $75,000. The annual savings from reduced accidents will sum up to $123,000. Besides, the municipality estimates the annual convenience benefits for residents on the route to reach $700,000. Yet, the annual disbenefit caused by the increase in travelling times by car is estimated to be $144,000 annualy. Find the B–C ratio, using modified version and treating disbenefits as costs, using a MARR of 7% and a study period of 13 years, to determine whether the new line should be constructed.

PLEASE SOLVE CAREFULLY!

Explanation / Answer

FOLLOWING STEPS SHOULD BE FOLLOWED TO CALCULATE B-C RATIO:

STEP 1:CALCULATION OF PRESENT VALUE OF BENEFITS.

P.V=P.V OF ANNUAL SAVINGS FROM REDUCED ACCIDENTS + P.V OF ESTIMATED ANNUAL CONVENIENCE BENEFITS

P.V= 123000PVAF(7,13) + 700000PVAF(7,13)

P.V= 123000*(8.3576) + 700000*(8.3576)

P.V= 1027984.8+5850320

P.V = 6878304.8

STEP2: CALCULATION OF PRESENT VALUE OF COST

P.V=INITIAL COST + P.V OF ANNUAL MAINTENANCE COST + P.V. OF ANNUAL DISBENEFIT

P.V= 9000000+75000*PVAF(7,13)+144000*PVAF(7,13)

P.V= 9000000+75000*(8.3576)+144000*(8.3576)

P.V= 9000000+626820+1203494.4

P.V= 10830314.4

STEP 3: CALCULATION OF B-C RATIO

B-C RATIO= P.V OF BENEFITS/ P.V OF COST

=6878304.8/10830314.4

=0.6351

CONCLUSION- SINCE B-C RATIO IS LESS THAN 1, THE PROJECT COST OUTWEIGH THE BENEFITS AND HENCE THE NEW LINE SHOULD NOT BE CONSTRUCTED.

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