Determine if the station is economically justified

As part of the rehabilitation of the downtown area of a southern U.S. city, the Parks and Recreation Department is planning to develop the space below several overpasses into basketball, handball, miniature golf, and tennis courts. The initial cost is expected to be $150,000 for improvements which are expected to have a 20-year life. Annual maintenance costs are projected to be $12,000. The department expects 24,000 people per year to use the facilities an average of 2 hours each. The value of the recreation has been conservatively set at $0.50 per hour.

At a discount rate of 3% per year, what is the B/C ratio for the project?

The fire chief of a medium-sized city has estimated that the initial cost of a new fire station will be $4 million. Annual upkeep costs are estimated at $300,000. Benefits to citizens of $550,000 per year and disbenefits of $90,000 per year have also been identified.

Use a discount rate of 4% per year to determine if the station is economically justified by (a) the conventional B/C ratio and (b) the B – C difference.

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