Think about a major governmentconstruction projectunder

Public-sector economic analysis and decisionmaking is often called a multi-actor or multi- stakeholder decision problem. Explain.

Compare the general underlying objective of publicdecision making versus private decision making.

The text recommends a viewpoint that is appropri-ate in public decision making. What is suggested?What example is given to highlight the dilemmaof viewpoint in public decision making? Provideanother example.

In government projects, what is meant by the phrasemost of the benefits are local? What conflict doesthis create for the federal government in the fundingprojects from public monies.

List the potential costs, benefits, and disbenefitsthat should be considered in evaluating a potentialnuclear power plant. What stakeholder viewpointswill need to be considered?

A municipal landfill and incineration facility isplanned. Name at least three benefits, three disben-efits, and three costs. What stakeholder viewpointswill need to be considered?

An interstate bypass will completely circle a city.Name at least three benefits, three disbenefits, andthree costs. What stakeholder viewpoints will needto be considered?

A light rail system will connect the airport, the citycenter, and a cluster of high-density housing on theother side of the river. Name at least three benefits,three disbenefits, and three costs. What stakeholderviewpoints will need to be considered

Improvements at a congestedintersection require thatthe government acquire the properties on the fourcorners: two gas stations, a church, and a bank. Con-struction will take a year, and the costs will be shared70% by the state and 30% by the city. Traffic throughthe intersection is mainly commuters, local residents,anddeliveriestoandbylocalbusinesses.Thereissomethrough traffic from other parts of the metropolitanarea.Identify the benefits, disbenefits, and costs thatmust be considered in evaluating this project. Fromthe citys viewpoint, which must be included? Fromthe states viewpoint? What viewpoint shouldbe usedto evaluate this project?

The state may eliminate a railroad grade crossingby building an overpass. The new structure, togetherwith the needed land, would cost $1.8 million. Theanalysis period is assumed to be 30 years becauseeither the railroad or the highway above it will berelocated by then. Salvage value of the bridge (actu-ally, the net value of the land on either side of therailroad tracks) 30 years hence is estimated to be$100,000. A 6% interest rate is to be used.About 1000 vehicles per day are delayed by trainsat the grade crossing.Trucks represent40%,and 60%are other vehicles. Time for truck drivers is valuedat $18 per hour and for other drivers at $5 per hour.Average time saving per vehicle will be 2 minutes ifthe overpass is built. No time saving occurs for therailroad.The railroad spends$48,000annually for crossingguards. During the preceding10-year period, the rail-road has paid out $600,000 in settling lawsuits andaccident cases related to the grade crossing. Theproposed project will entirely eliminate both theseexpenses. The state estimates that the new overpasswill save it about $6000 per year in expenses directlydue to the accidents.Theoverpass,ifbuilt, will belongto the state.Should the overpass be built? If the overpass isbuilt, how much should the railroad be asked tocontribute to the state as its share of the $1.8 millionconstruction cost?

Discussthe alternative conceptsthatcan be employedwhen setting the discounting rate for economic anal-ysis in the public sector. What is the authors finalrecommendation for setting this rate?

The citys landfill department has a capital budget of$600,000. What is the governments opportunity costof capital if it has the following projects to consider? What does this indicate about which projects shouldbe done?First Rate of B/C RatioProject Cost Return(%) at 7%A$100,000 23 1.30B200,000 22 1.40C300,000 17 1.50D200,000 19 1.35E100,000 18 1.56

The states fish and game department has a capi-tal budget of $9 million. What is the governmentsopportunity cost of capital if it has the followingprojects to consider? What does this indicate aboutwhich projects should be done?FirstRate of B/C RatioProject Cost Return (%) at 7%A$2,000,000 9 1.23B1,000,000 14 1.42C2,000,000 10 1.17D3,000,000 16 1.45E2,000,000 13 1.56F3,000,000 15 1.35G3,000,000 12 1.32H1,000,000 11 1.26

A proposed bridge would cost$4 million to build and$180,000 per year in maintenance.The bridge shouldlast 40 years. Benefits to the driving public are esti-mated to be $900,000 per year. Damages (not paid)to adjacent property owners due to noise is estimatedto be $250,000 per year. Because of the uncertaintyon what interest rate should be used to evaluate thisproject, calculate the breakeven annual interest ratethat results in a B/C ratio of 1.Contributed by D. P. Loucks, Cornell University

Is the 7% interest rate specified in OMB A94 areal or a nominal interest rate? Should it be usedwith costs expressed as constant-value dollars orwith costs inflated using carefully selected inflationrates?

A municipal bond has a face value of $10,000. Inter-est of $400 is paid every 6 months. The bond has alife of 20 years. What is the effective rate of inter-est on this bond? Is this rate adjusted for inflation?What is the municipal governments cost of capitalfor this bond?Estimate the rate, considering all levelsof government.

Consider the following investment opportunity:Initial cost$100,000Additional cost at end of Year 1 150,000Benefit at end of Year 10AnnualbenefitperyearatendofYears 21020,000With interest at 7%, what is the benefitcost ratiofor this project? (Answer:0.51)

Calculate the conventional and modified benefitcost ratios for the following project.Required first costs $1,200,000Annual benefits to users $500,000Annual disbenefits to users $25,000Annual cost to government $125,000Project life35 yearsInterest rate10%

For the data given in Problem 16-18, for handlingbenefits and costs, demonstrate that the calculatedB/C ratio is the same using each of the followingmethods: present worth, annual worth, and futureworth.

What is the essential difference between theconventionalandmodifiedversions of the benefitcost ratio? Is it possible for these two measuresto provide conflicting recommendations regardinginvest/do-not- invest decisions?

A government agency has estimated that a floodcontrol project has costs and benefits that areparabolic, according to the equation(Present worth of benefits)222(Present worth of cost)+44=0where both benefits and costs are stated in millionsof dollars. What is the present worth of cost for theoptimal size project?

Chungyang Dam is being constructed across theHungshui River in southern China. The dam willproduce electricity to serve over 500,000 peoplein the region. The initial cost is 3.7 billion yuanand annual operating costs are 39.2 million yuan.A major overhaul of the electric generation facili-ties estimated to cost 650 million yuan will occur atthe end of Year 25. The dam and generating planthave no salvage value, but must be torn down andremoved at the end of Year 50 for 175 million yuan.Ishan Electric has a MARR of 10%. What annualbenefit in yuan is needed for a B/C ratio of 1? Usethe Internet and current exchange rates to find theannual benefit in U.S. dollars.Contributed by Paul R. McCright, University ofSouth Florida

The Highridge Water District needs an additionalsupply of water from Steep Creek. The engineerhasselected two plans for comparison:Gravity plan:Divert water at a point 10 milesup Steep Creek and carry it through apipeline by gravity.Pumping plan:Divert water at a point nearthe district and pump it through 2 miles ofpipeline. The pumping plant can be built intwo stages: half now and half 10 years later.Gravity PumpingInitial investment$2,800,000 $1,400,000Investment in 10thyear0 200,000Operation, maintenance, 10,000 25,000replacements, per yearAverage annual power costFirst 10 years0 50,000Next 30 years0 100,000Use a 40-year analysis period and 8% interest.Salvage values can be ignored. Use the conven-tional benefitcost ratio method to select the moreeconomical plan

Two different routes are being considered for amountain highway. Thehigh roadwould requirebuilding several bridges and would navigate aroundthe highest mountain points, thus requiring moreroadway. Thelow roadwould construct severaltunnels for a more direct route through the moun-tains. Projected travel volume for this new sectionof road is 2500 cars per day. Use themodifiedB/C ratio to determine which alternative should berecommended. Assume that project life is 45 yearsandi=6%.High Road Low RoadConstruction cost/mile $200,000 $450,000Number of miles required 35 10Annual benefit/car-mile $0.015 $0.045Annual O&M costs/mile $2,000 $10,000

The city engineer has prepared two plans forroads in the city park. Both plans meet anticipatedrequirements for the next 40 years. The citys mini-mum attractive rate of return is 7%.PlanAis a three-stage development program:$300,000 is to be spent now followed by $250,000at the end of 15 years and $300,000 at the end of 30years. Annual maintenance will be $75,000 for thefirst 15 years, $125,000 for the next 15 years, and$250,000 for the final 10 years.PlanBis a two- stage program: $450,000 isrequired now, followed by $50,000 at the end of15 years. Annual maintenance will be $100,000 forthe first 15 years and $125,000 for the subsequentyears. At the end of 40 years, this plan has a salvagevalue of $150,000.Use a conventional benefitcost ratio analysis todetermine which plan should be chosen.

The Arkansas Department of Transportation maybuild a new highway between Texarkana and FortSmith, currently a distance of 181 miles. Design 1is a four-lane highway built entirely on the exist- ing route. Design 2 includes a significant reroutingthrough a mountainous region that would reducethe mileage to 166 miles. Design 3 is a fully access-controlled interstate-quality highway with morererouting, which would reduce the total mileage to148 miles.Benefits for this project depend on mileagesaved times the number of vehicles, plus the esti-mated value for the larger number of trips thatwill occur with the shorter and faster routes. Theestimated benefits and costs of the three potentialdesignsare shown in the table. Doing nothing yieldsno costs and no benefits. Using incremental anal-ysis for the B/C ratio, a planning horizon of 75years, and a MARR of 9%, which design wouldyou recommend?AnnualMaintenance AnnualInitial Cost Cost BenefitDesign 1 $ 456M $17M $107MDesign 2 810M 28M 198MDesign 3 1552M 58M 287MContributed by Paul R. McCright, University ofSouth Florida

A two-lane highway between two cities, 10 milesapart, is to be converted to a four-lane divided free- way. The average daily traffic (ADT) on the newfreeway is forecast to average 20,000 vehicles perday over the next 20 years. Trucks represent 5% ofthe total traffic. Annual maintenance on the existing highway is $1500 per lane-mile. The existing acci-dent rate is 4.58 per million vehicle-miles (MVM).Three alternate plans are under consideration.Plan A:Improve along the existing developmentby adding two lanes adjacent to the existing lanesat a cost of $450,000 per mile. This will reduceauto travel time by 2 minutes and truck travel timeby 1 minute. The estimated accident rate is 2.50 perMVM. Annual maintenance is $1250 per lane-mile.Plan B:Improve the highway along the existingalignment with grade improvements at a cost of$650,000per mile. PlanBadds two lanes and wouldreduce auto and truck travel time by 3 minutes each.The accidentrate on this improved road is estimatedto be 2.40 per MVM. Annual maintenance is $1000per lane-mile.Plan C:Construct a new freeway on a new align-mentat a costof $800,000permile. This plan wouldreduceauto travel time by 5 minutes andtruck traveltime by 4 minutes. PlanCis 0.3 mile longer thanAorB. The estimated accident rate forCis 2.30 perMVM. Annual maintenance is $1000 per lane-mile.PlanCincludes abandoning the existing highwaywith no salvage value.Incremental operating costAutos6?c per mileTrucks18?c per mileTime savingAutos3?c per minuteTrucks15?c per minuteAverage accident cost$1200If a 5% interest rate is used, which of the threeproposed plans should be adopted? (Answer:PlanC)

Evaluate these mutually exclusive alternatives witha horizon of 15 years and a MARR of 12%.ABCInitial investment$9500 $18,500 $22,000Annual savings 3200 5,000 9,800Annual costs 1000 2,750 6,400Salvage value 6000 4,200 14,000Use each of these approaches:(a)ConventionalB/C ratio(b)ModifiedB/C ratio(c)Present worth analysis(d)Internal rate of return analysis(e)Payback period

A 50-meter tunnel must be constructed for a newcity aqueduct. One alternative is to build a full- capacity tunnel now for $500,000. The other alter-native is to build a half-capacity tunnel now for$300,000 and then to build a second parallel half-capacity tunnel 20 years hence for $400,000. Thecost to repair the tunnel lining every 10 years is$20,000 for the full-capacity tunnel and $16,000 foreach half-capacity tunnel.Determine whether the full-capacity tunnel orthe half-capacity tunnel should be constructed now.Solve the problem by the conventional benefitcostratio analysis,using a 5% interest rate and a 50-yearanalysisperiod.There will be no tunnellining repairat the end of the 50 years.

The Fishery and Wildlife Agency of Ireland isconsidering four mutually exclusive design alterna-tives for a major salmon hatchery. This agency ofthe Irish government uses the following B/C ratiofor decision making:B/C ratio=EW(Net benefits)EW(Capital recovery cost)+EW(O&M cost)Using an interest rate of 8% and a project life of30 years, recommend which design is best.(Values in 1000s)Irish Fishery Design AlternativesAB C DFirst cost $9500 $12,500 $14,000 $15,750Annual benefits 2200 1,500 1,000 2,500Annual O&M costs 550 175 325 145Annual disbenefits 350 150 75 700Salvage value 1000 6,000 3,500 7,500

Six mutually exclusive investments have beenidentified for evaluation by means of the benefitcost ratio method. Assume a MARR of 10% and anequal project life of 25 years for all alternatives.Mutually Exclusive AlternativesAnnualized123456Net costs to 15.5 13.7 16.8 10.2 17.0 23.3sponsor ($M)Net benefits 20.0 16.0 15.0 13.7 22.0 25.0to users ($M)(a)Use annual worth and the B/C ratio to identifythe better alternative b)If this were a set ofindependentalternatives,how would you conduct a comparison?

A section of state highway needs repair. At present,the traffic volume is low and few motorists wouldbenefit. However, traffic is expected to increase,with resulting increased motorist benefits. Therepair work will produce benefits for 10 years afterit is completed.Should the road be repaired and, if so, whenshould the work be done? Use a 15% MARR.(Costs in 1000s)Repair Repairin Repairin Repair inYear Now 2 Years 4 Years 5 Years0$15015210$1503202043030$15054040 40$15065050 50 5075050 50 5085050 50 5095050 50 5010 50 50 50 5011050505012050505013 0 0 50 5014 0 0 50 5015 0 0 0 50

The local highway department is analyzing recon-struction of a mountain road. The vehicle trafficincreases each year, hence the benefits to the motor-ing public also increase.Basedon a traffic count,thebenefits are projected as follows:Year End-of- YearBenefit2011$10,000201212,000201314,000201416,000201518,000201620,000and so on, increasing$2000 per yearThe reconstructed pavement will cost $275,000when it is installed and will have a 15-year use-ful life. The construction period is short, hence abeginning-of-year reconstruction will result in the listed end-of-year benefits. Assume a 6% interestrate. The reconstruction, if done at all, must be done not later than 2016. Should it be done, and if so, in what year?

Big City Carl, a local politician, is pushing a newdock and pier systemat the river to attract commerce.A committee appointed by the mayor (an opponentofCarls) has developed the following estimates.Cost to remove current$ 750,000facilitiesMaterial, labor, and overhead for 2,750,000new constructionAnnual operating & maintenance 185,000costsAnnual benefits from new550,000commerceAnnual disbenefits to sportsmen 35,000Project life20 yearsInterest rate8%(a)Using theconventionalB/C ratio, determinewhether the project should be funded.(b)After studying the numbers given by thecommittee, Big City Carl argued that the projectlife should beat least25 years and more likelycloser to 30 years. How did he arrive at thisestimate, and why is he making this statement?

The federal government proposes to construct a mul-tipurpose water project to provide water for irrigationand municipaluse.In addition, there are flood controland recreation benefits. The benefits are given below.The annual benefits are one-tenth of the decade ben-efits. The operation and maintenance cost is $15,000peryear.Assumea50-yearanalysisperiodwithnonetproject salvage value.(a)If an interest rate of 5% is used, and a benefitcost ratio of unity, what capital expenditure canbe justified to build the water project now?(b)If the interest rate is changed to 8%, how doesthis change the justified capital expenditure?(Benefits in 1000s)DecadesPurpose First Second Third Fourth FifthMunicipal $ 40 $ 50 $ 60 $ 70 $110Irrigation 350 370 370 360 350Flood control 150 150 150 150 150Recreation 6070808090Totals $600 $640 $660 $660 $700

If you favored PlanBin Problem16-25,whatvalue ofMARR would you use in the computations? Explain.

Describe how a decision maker can use each of thefollowing to skew the results of a B/C ratio anal- ysis in favor of his or her own position on fundingprojects.(a)Conventional versus modified ratios(b)Interest rates(c)Project duration(d)Benefits, costs, and disbenefits

Briefly describe your sources and methods for esti-mating the value of(a)a saved hour of commuting time.(b)converting 15 miles of unused railroad tracksnear a community of 300,000 into a new bikepath.(c)reducing annual flood risks from the MississippiRiver for St. Louis by 5%.(d)a human life.

Discuss potential data sources and methods forestimating each of the costs, benefits, and disbene- fits identified in Problem 16-5 for the nuclear powerplant.

For the municipal landfill and incineration facilityin Problem 166, discuss potential data sources andmethods for estimating each of the benefits, disbene-fits, and costs.

For the interstate bypass in Problem 16-7, discusspotential data sources and methods for estimatingeach of the benefits, disbenefits, and costs.

For the light rail system in Problem 16-8, discusspotential data sources and methods for estimatingeach of the benefits, disbenefits, and costs.

Discuss potential data sources and methods for esti-mating each of the costs, benefits, and disbenefitsidentified in Problem 16-9 for the congestedintersec-tion.

Think about a major governmentconstruction projectunder way in your state, city, or region. Are the deci-sion makers who originally analyzed and initiatedthe project currently in office? How can politiciansuse political posturing with respect to governmentprojects?Minicases

Research and report on how an agency of your stateevaluates public project proposals. What interest rateand what economic measures are used?

Researchand reporton how an agencyofyourmunic-ipality evaluatespublic project proposals.What inter-est rate and what economic measures are used? Problems563The data supplied adds detail to the chapter-openingvignette.The three problems that follow the data werecontributed byWilliam R. Truran, Stevens Instituteof Technology, and Peter A. Cerenzio, Cerenzio &Panaro Consulting EngineersDaily and intermediate cover material is 20% ofthe landfills usable space. Density of solid waste is1500 pounds per cubic yard. LFG recovery rates:3000 cubic feet per ton for municipal solidwaste (MSW)1500 cubic feet per ton for construction anddemolition waste (C&D)Assume waste composition is 80% MSW and 20%C&D.Methane content in the LFG is 50% for MSW and20% for C&D.Heating valueFor methane: 1,030,000 BTU/1000 cubic feetFor fuel oil: 138,800 BTU/gallonAssumed furnace efficiency is 88% for methaneand 82% for fuel oil.Cost of fuel oil is $2.50/gallon.Heating load for residential dwelling is100 million BTU per year.1.7104BTU per kilowatt- hoursValue=$0.05/kWh

An economic analysis is needed for a new municipalsolid waste landfill. This includes determining thepotential economic benefit from the gas that is gen-erated when solid waste decomposes. The landfill isproposed at 14 acres, with a design capacity of 1 mil-lion cubic yards of capacity.The finalcappingsystemwill require a 3-foot layer over the 14 acres, and thewaste flow rate is 120,000 tons per year. Calculate:(a)The life of the landfill.(b)The average annual methane production (assumeall methane production has ceased by 15 yearsafter landfill closure).(c)The dollar value of annual methane converted toelectricity (neglect collection and energy produc-tion costs).

A developer has proposed a 650-unit residentialdevelopment adjacent to the landfill. The proposalincludes using the gas generated from the landfill toheat the homes (and mitigateodors).To determine theeconomic feasibility of the proposal, the value of thegas for heating purposes must be determined. Deter-mine whether the quantity is sufficient for heatingthe development.Is this economically more attractivethan using fuel oil? Is it operationally feasible?

A 4.6-acre landfill must be evaluated for economicviability. As part of the costbenefit analysis, thecost to extract and treat the landfill gas must bedetermined.Using the following, design a landfill gasextraction system and estimate the cost to implementsuch a system:Landfill dimensions are 1000 feet by 200 feet.Area of influence of a landfill gas extractionwell is a 50-foot radius.Cost of well construction is $3000 each.Cost of wellhead (necessary for each well) is$2500 each.Cost of collection header piping 8diameterHDPE is $35/linear foot.Cost of condensate knockouts (located at lowpoints) is $5000 each.Cost of blower/flare station is $500,000.