EC 145E Sample Benefit-Cost Problems

EC 145E Sample Benefit-Cost Problems - Environmental...

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Environmental Economics EC 145E UCI Dr. Bresnock Sample Benefit-Cost Problems 1. A proposed state computer system is designed to facilitate motor vehicle licensing by speeding the processing of licenses and eliminating duplicative functions. The system is expected to cost \$5,000,000 to implement. In another state, the same vendor proposed a similar system at an identical cost, but actual implementation was more complex than anticipated and thus final costs turned out to be \$6,500,000. The vendor now claims that this previous experience should allow costs to be reduced, so they optimistically estimate costs at \$4,250,000. All costs can be considered as initial costs and need not be discounted. The system's benefits result from reduced staff time. In the most optimistic case, 90,000 hours would be saved each year for the five-year expected life of the system. The expected value for annual savings is 70,000 hours, and a pessimistic estimate is 50,000 hours. For each hour saved, the state's total cost is \$20. However, this is an optimistic estimate of the potential dollar savings, since some staff positions may not be eliminated even though the time demands are reduced. Thus, a savings of only \$14 is expected for each hour. Critics of the system have claimed that few workers will actually be replaced, so that actual savings are \$7 per hour. (a) Perform a variable-by-variable sensitivity analysis of this project, computing benefit-cost ratios with an interest rate of 8 percent. Please present all calculations, and summarize your results in an organized table or matrix. (b) The governor has defined three scenarios for possible consideration of those that are possible. They are: (1) Initial costs are \$5,000,000, with annual savings of 70,000 hours at \$14 per hour for five years. (2) Initial costs are \$6,500,000, with annual savings of 70,000 hours at \$20 per hour for five years. (3) Initial costs are \$4,250,000, with annual savings of 70,000 hours at \$14 per hour for five years. Using a 4 percent interest rate, which of these scenarios produces a desirable project? Use the present worth factors below to compute your answers to these problems. Environmental Economics Dr. Bresnock Sample Benefit-Cost Problems

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Year PWF (r = 8%) PWF (r = 4%) 1 .926 .962 2 .857 .925 3 .794 .889 4 .735 .855 5 .681 .822 2. An economist has been retained to evaluate the economic feasibility of converting the Space Cadet Military Air Base for use as an international commercial and cargo airport. (Assume that there are no closely proximate international airports, and/or that any relatively close competitors have reached capacity limitations, as stipulated by the Federal Airborne Administration (FAA), to provide additional services. The
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This note was uploaded on 02/10/2010 for the course MATH 145 taught by Professor Dunno during the Winter '08 term at DeAnza College.

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EC 145E Sample Benefit-Cost Problems - Environmental...

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