Decide between two alternative proposals to reduce congestion on and near campus

Question

Decide between two alternative proposals to reduce congestion on and near campus. Proposal 1 would ban almost all private cars. The project would cost $35 million to implement, reduce congestion by 40% in the relevant area, and have a 75% chance of providing a net present benefit of $40 million. Project 2 would increase bus coverage and provide additional park and ride lots at no cost to students or employees. This project would cost $15 million, reduce congestion by 30%, and have a 50% chance of providing a net present benefit of $20 million. Please advise the University as to which project it should pursue and why?

Explanation / Answer

Expected outcome of proposal 1 = Expected benefit - project cost

= 40x0.75 - 35

= - $5 million

Expected outcome of proposal 2 = Expected benefit - project cost

= 20x0.5 - 15

= - $5 million

Both projects have same expected outcome in terms of the cost. Project 1 will decrease the congestion by 40% and project 2 will decrease the congestion by 30%.

So, it is advisible to pursue project 1

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