The State Highway Department is considering a bypass loop that is expected to save motorists $820,000 per year in gasoline and other automobile-related expenses. However, local businesses will experience revenue losses estimated to be $135,000 each year. The cost of the loop will be $9,000,000. (a) Calculate the conventional B/C ratio using an interest rate of 6% per year and a 20-year project period. (b) Calculate the conventional B/C ratio without considering the disbenefits. Is the project economically justified with and without considering the revenue losses? (c) Develop the single-cell spreadsheet functions that will answer the two questions above.
What will be an ideal response?
(a) AW of B-D = 820,000 – 135,000
= $685,000
AW of C = 9,000,000(A/P,6%,20)
= 9,000,000(0.08718)
= $784,620
B/C = 685,000/784,620 = 0.87 Not justified
(b) Disbenefits not considered: B/C = 820,000/784,620 = 1.05 Marginally justified
(c) With disbenefits: = 685000 /PMT(6%,20,9000000) displays 0.873
Without disbenefits: =820000/PMT(6%,20,9000000) displays 1.045
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