Question

1. The city of Las Venturas is considering replacing one of the bridges that cross a river that runs through town. The primary benefits of replacing the current bridge are reductions in commute time, traffic, and better foot traffic safety for people walking across the bridge. The expected cost of the bridge is $8 million. The expected benefits from primary sources over the coming years are $4 million immediately, and $1 million each year over the next 4 years. Discuss the cost-benefit analysis associated with this project. Is it possible to improve the cost-benefit analysis? Is anything missing from it?. Should the city go forward with the project? Why or why not?

Answer 1

Initial cost of bridge = $8 million

Net benefit in 4 years = $8 million

This construction is fruitful if society have $8 million in cash to spend on goods because it will also raise societal welfare but we have to consider the rate of interest in account if society is going to borrow money from bank or any other source. Present value of Net benefit will be lesser because present value is calculated as [Net benefit in any year / (1 + Rate of Interest)^^Year]

Cost - benefit analysis would be: (Present value of benefit / Initial cost). Present value of this project would surely be less than 1 considering rate of interest into account which makes this policy unattractive. To improve cost benefit analysis, locals should look for raising revenue from that bridge such as rising business / trade for that town. As cost - benefit value is less than 1, city should not go with this project.