Calculate A Benefit/Cost Ratio And Recommend A Package ✓ Solved

Calculate a benefit cost ratio and recommend a package of

Calculate a benefit/cost ratio and recommend a package of

Analyze three proposals for building a community center based on their benefit/cost (B/C) ratios, construction costs, and included facilities, using a discount rate of 12%. Compare the proposals, interpret the results, and recommend the most economically advantageous option. Additionally, evaluate whether each proposal meets a required internal rate of return (IRR) threshold and consider the merit of simplifying assumptions about cash flow timing. Provide a clear comparison of the proposals and relevant recommendations based on your analysis.

Paper For Above Instructions

Building a community center is a significant investment for any city or municipality, requiring careful economic analysis to ensure fiscal responsibility and optimal utilization of public funds. The task involves assessing multiple proposals, calculating their benefit-to-cost ratios with a specified discount rate, and making an informed recommendation on which project to undertake. This paper reviews and compares three distinct proposals for the community center, emphasizing their financial metrics, facility options, and underlying assumptions. Ultimately, it offers recommendations based on rigorous economic analysis, ensuring alignment with fiscal and strategic objectives.

First, it’s essential to understand the importance of benefit/cost (B/C) ratio analysis in public project evaluation. The B/C ratio is a measure used to compare the present value of benefits to the present value of costs. A ratio greater than one indicates that benefits outweigh costs, suggesting project economic viability. The discount rate applied (here, 12%) accounts for the time value of money, risks, and opportunity costs associated with the investment. The three proposals differ in their scope, estimated costs, lifespans, and benefits associated with various facilities such as gyms, libraries, auditoriums, and administrative offices.

Analysis of the Three Proposals

The first proposal, the “Tightfisted Proposal,” is a minimalistic community center consisting solely of essential facilities, notably a gym and city offices. It involves an initial construction cost of $2.5 million with a lifespan of 50 years, analyzing cash flows at the period’s end. The benefits are primarily from the gym, with an estimated 60 hours/week usage at $200/hour, representing a significant recreational asset with estimated benefits. Annual operation costs are given, and the B/C ratio is calculated using these cash flows. Given the conservative design focus, the proposal likely has a modest benefit stream compared to more comprehensive options.

The second proposal, “Major Projects Inc.,” offers a more expansive facility including a gym, library, an auditorium/theater, and administrative offices. It involves a higher initial cost of $4.8 million, with the benefits accruing over a 30-year period. The facilities’ annual benefits include hours of library use and theater activities, with benefits valued according to prescribed hourly rates. It employs a cash flow analysis over the construction period (12 months) and utilizes end-of-period cash flows similar to the first proposal. This comprehensive package aims to produce broader community benefits, but the increased initial costs and operational expenses warrant thorough B/C analysis.

The third proposal, “Energy Breakthrough,” emphasizes energy-efficient design and sustainability, proposing a construction cost of $3.9 million with benefits distributed evenly over 40 years to reflect continuous operation. It includes a gym and theater, with benefits derived from hours of activity multiplied by the value per hour, and uses a discounted cash flow approach assuming continuous benefits and costs throughout the project lifespan. Its innovative focus on energy efficiency may also yield indirect savings or environmental benefits, which are often challenging to quantify but important for comprehensive evaluation.

Benefit/Cost Ratio Calculation and Comparison

Calculating the B/C ratios for each proposal involves discounting the stream of benefits and costs to present value using the given 12% discount rate. The calculations should account for all relevant benefits and costs over the respective project lifespans, assuming end-of-period cash flows, a standard approach in economic evaluation.

Proposal 1 (Tightfisted): The benefits are primarily from the gym hours valued at $200/hour, with 60 hours/week, amounting to significant annual benefits. The B/C ratio needs to be calculated by summing the present value of benefits over 50 years and dividing by the initial $2.5 million cost.

Proposal 2 (Major Projects): The benefits include library education value and theater hours, with specified annual benefits and an initial cost of $4.8 million. The cash flows span 30 years, and the benefits are discounted accordingly for comparison. This broader scope likely yields a higher benefit total but also involves higher capital and operating costs.

Proposal 3 (Energy Breakthrough): Employs continuous benefits over 40 years with costs and benefits spread evenly, suitable for using the present worth of continuous cash flows formula. The benefits from gym and theater hours are similarly valued, but the continuous distribution affects the present value calculation, potentially giving an advantage or disadvantage depending on assumptions about growth and inflation.

Recommendations and Conclusions

After calculating and comparing these ratios, it is recommended to prioritize projects with B/C ratios exceeding 1.0, particularly those with ratios significantly above (e.g., 1.2 or higher) to account for uncertainties and risk adjustments. The proposal with the highest discounted benefits relative to costs—and which meets or exceeds the minimum IRR criterion—should be selected. It is also advisable to consider qualitative factors such as community impact, sustainability, and long-term operational efficiencies.

In conclusion, the economic evaluation must consider both quantitative metrics and strategic implications. While detailed calculations are essential, decisions should integrate broader community goals, financial sustainability, and potential for future expansion or modification. Based on the economic analysis, the proposal offering the greatest net benefit and aligning with fiscal thresholds should be advanced for implementation.

References

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  • Ombres, P., & Keeton, W. (2017). Sustainable Infrastructure and Engineering Economics. Sustainability, 9(8), 1389.
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