Q1.The five star resort in the mountain would like to generate its own electrici

Question

Q1.The five star resort in the mountain would like to generate its own electricity energy by installing mini hydropower plant in near by river. And there are costs and benefits associated to this project. As a strategic manager you are tasked to do Cost Benefit Analysis. In your analysis you have given following valuations to the project input and outcomes. Place these elements into CBA table and find out Total Cost, Total Benefit and Benefit Cost Ratio. - Construction of the plant requires 50,000$ - The lifespan of the plant is 40 years - Maintenance cost per year is 1000$ - You save 4500$ per year in electricity energy bill consumption - Opportunity cost you expect is 10,000$ - There are also risks you anticipate and given valuation as 8,000$ - You will have to install generator in case of emergency which costs 12,000$ - As part of your environmental friendly initiative the resort will receive appreciation from customers and you value it as 15,000$ - Employees motivation you hope to be valued as 7,000$ - You also believe this initiative will strengthen Resort’s brand and value it as 10,000$

2.1 What is Total Benefit?

2.2 What is Total Cost?

2.3 What is Benefit Cost Ratio?

Explanation / Answer

Ans 1.

Total Benefit = Electricity Energy Bill per year * 40 + Environmental Friendly Appreciation Cost + Employee Motivation + Resort's Brand Value Increment

= $ (4,500*40 + 15,000 + 7,000 + 10,000)

= $ 212,000

Ans 2.

Total Cost = Contruction Cost + Maintenance Cost per year * 40 + Opportunity Cost + Risks + Generator Cost

= $ (50,000 + 1,000*40 + 10,000 + 8,000 + 12,000)

= $ 120,000

Ans 3. The benefit cost ratio is 212000/120000 = 1.76

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