The city of Calgary has a new subdivision, Paradise Mountain, at its outskirts. The city wants to encourage the growth of Paradise Mountain by improving transportation between Paradise Mountain and the centre of Calgary. Two altematives are being considered (1) new buses on the route between Paradise Mountain and Calgary and (2) improvement of the road between Paradise Mountain and Calgary. Both projects will have as their main benefit improved transportation between Paradise Mountain and Calgary. Rather than measuring the value of this benefit directly to the city, engineers have estimated the benefit in terms of an increase in the value of land in Paradise Mountain. That is, potential residents are expected to show their evaluations of the present worth of improved access to the town centre by their willingness to pay more for homes in Paradise Mountain. The road improvement will entail construction cost and increased operating and maintenance costs. In addition, the improved road will require construction of a parking garage in the centre of Calgary. The new buses will have a first cost as well as operating and maintenance costs. Information about the two alternatives is shown below. Complete parts (a) through (C). Road Improvement $15,000,000 $4,500,000 New Buses $4.750.000 $10,000,000 First Cost PW (operating and maintenance cost) Parking garage cost $3,500,000 Estimated increased land value $25,000,000 $16,000,000 a. Compute the benefit-cost ratio of both alternatives. Is each individually viable? Considering the parking garage as a cost, the Road Improvement's benefit-cost ratio is The benefit-cost ratio for the New Buses is V are individually viable. The parking garage can be considered as a benefit reduction instead of a cost, as well. Considering the parking garage as a benefit reduction, the Road Improvement's benefit-cost ratio is V are individually viable, considering the parking garage as a benefit reduction rather than a cost. (Round to three decimal places as needed.) b. Using an incremental benefit-cost ratio approach, which of the two alternatives should be chosen? Using the incremental benefit-cost ratio approach, if the parking garage is considered as a cost, then the benefit-cost ratio (Road Improvement - New Buses) would be If the parking garage is considered as a benefit reduction, then the benefit-cost ratio (Road Improvement - New Buses) would beN The V alternative should be chosen in either case. (Round to three decimal places as needed.) c. Compute the present worths of the two alternatives. Compare the decision based on present worths with the decisions based on benefit-cost The net present worth of the Road Improvement is S The net present worth of the New Buses is S Considering the parking garage as a cost, the incremental benefit-cost ratio is V than 1, in which case it is M with the Road Improvement having a present worth V than the New Buses V than 1, in which case it is V than the New Buses. Now, considering the parking garage as a benefit reduction, the incremental benefit-cost ratio is (Round to the nearest dollar as needed.) with the Road Improvement having a present worth

The city of Calgary has a new subdivision, Paradise Mountain, at its outskirts. The city wants to encourage the growth of Paradise Mountain by improving transportation between Paradise Mountain and the centre of Calgary. Two altematives are being considered (1) new buses on the route between Paradise Mountain and Calgary and (2) improvement of the road between Paradise Mountain and Calgary. Both projects will have as their main benefit improved transportation between Paradise Mountain and Calgary. Rather than measuring the value of this benefit directly to the city, engineers have estimated the benefit in terms of an increase in the value of land in Paradise Mountain. That is, potential residents are expected to show their evaluations of the present worth of improved access to the town centre by their willingness to pay more for homes in Paradise Mountain. The road improvement will entail construction cost and increased operating and maintenance costs. In addition, the improved road will require construction of a parking garage in the centre of Calgary. The new buses will have a first cost as well as operating and maintenance costs. Information about the two alternatives is shown below. Complete parts (a) through (C). Road Improvement $15,000,000 $4,500,000 New Buses $4.750.000 $10,000,000 First Cost PW (operating and maintenance cost) Parking garage cost $3,500,000 Estimated increased land value $25,000,000 $16,000,000 a. Compute the benefit-cost ratio of both alternatives. Is each individually viable? Considering the parking garage as a cost, the Road Improvement's benefit-cost ratio is The benefit-cost ratio for the New Buses is V are individually viable. The parking garage can be considered as a benefit reduction instead of a cost, as well. Considering the parking garage as a benefit reduction, the Road Improvement's benefit-cost ratio is V are individually viable, considering the parking garage as a benefit reduction rather than a cost. (Round to three decimal places as needed.) b. Using an incremental benefit-cost ratio approach, which of the two alternatives should be chosen? Using the incremental benefit-cost ratio approach, if the parking garage is considered as a cost, then the benefit-cost ratio (Road Improvement - New Buses) would be If the parking garage is considered as a benefit reduction, then the benefit-cost ratio (Road Improvement - New Buses) would beN The V alternative should be chosen in either case. (Round to three decimal places as needed.) c. Compute the present worths of the two alternatives. Compare the decision based on present worths with the decisions based on benefit-cost The net present worth of the Road Improvement is S The net present worth of the New Buses is S Considering the parking garage as a cost, the incremental benefit-cost ratio is V than 1, in which case it is M with the Road Improvement having a present worth V than the New Buses V than 1, in which case it is V than the New Buses. Now, considering the parking garage as a benefit reduction, the incremental benefit-cost ratio is (Round to the nearest dollar as needed.) with the Road Improvement having a present worth

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 9E

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