Question

One of two alternatives will be selected to reduce flood damage in a rural community in central Arizona. The estimates associated with each alternative are available. Use B/C analysis at a discount rate of 5% per year over a 20-year study period to determine which alternative should be selected. For analysis purposes only, assume that the benefits of reduced flood damage are available in years 3, 11, and 18 of the study period.

	Retention Pond	Channel
Initial Cost, $	840,000	2,200,000
Annual Maintenance , $/Year	92,000	30,000
Reduced Flood Damage, $	200,000	700,000

The ΔB/C ratio is  ...............

The alternative that should be selected is the ................

Answer 1

The incremental benefit is 5,00,000 that occurs in 3, 11 and 18 years. Present worth of benefits is 5,00,000[(P/F, 5%, 3) + (P/F, 5%, 11) + (P/F, 5%, 18)] = 500,000*(0.8638+0.5847+0.4155) = $9,32,000

Incremental initial cost is 13,60,000 and annual incremental cost is 62,000. Present worth of costs is =13,60,000 + 62000(P/A, 5%, 20) = -13,60,000 + 7,72,657 = $587,343

Incremental benefit cost ratio is$9,32,000 /$587,343 = 1.5868

Hence B/C Ratio for Retention Pond is less than Channel we will select Channel.