TABLE 7.1 Estimates of Costs and Benefits, and the Incremental B/C Analysis for Four Water Park Proposals, Example 7.4 Proposal 1 Proposal 2 Proposal 3 Proposal 4 Initial incentive, $ 250,000 350,000 500,000 800,000 Tax incentive cost, $/year Resident entrance fees, $/year Extra sales taxes, $/year Study period, years 25,000 35,000 50,000 80,000 500,000 450,000 425,000 250,000 310,000 320,000 320,000 340,000 8 8 8 8 AW of total costs, $/year 66,867 93,614 133,735 213,976 Alternatives compared 2-to-1 3-to-2 4-to-2 Incremental costs AC, $/year Entrance fee reduction, $/year Extra sales tax, $/year Incremental benefits AB, $/year 26,747 40,120 120,362 50,000 25,000 200,000 10,000 20,000 60,000 25,000 220,000 Incremental B/C ratio 2.24 0.62 1.83 Increment justified? Yes No Yes Alternative selected 2 2 4
The Economic Development Corporation (EDC) for the city of Bahia, California, and Moderna County is operated as a not-for-profit corporation. It is seeking a developer that will place a major water park in the city or county area. Financial incentives will be awarded. In response to a request for proposal (RFP) to the major water park developers in the country, four proposals have been received. Larger and more intricate water rides and increased size of the park will attract more customers, thus different levels of initial incentives are requested in the proposals. Approved and in-place economic incentive guidelines allow entertainment industry prospects to receive up to $1 million cash as a first-year incentive award and 10% of this amount each year for 8 years in property tax reduction. Each proposal includes a provision that residents of the city or county will benefit from reduced entrance (usage) fees when using the park. This fee reduction will
be in effect as long as the property tax reduction incentive continues. The EDC has estimated the annual total entrance fees with the reduction included for local residents. Also, EDC estimated the benefits of extra sales tax revenue. These estimates and the costs for the initial incentive and annual 10% tax reduction are summarized in as shown. Perform an incremental B/C study to determine which park proposal is the best economically. The discount rate is 7% per year.
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