Reference no: EM132506612

The Shoreline Condominium Association is considering whether to install a major new heating system. They will have the owners of the 195 units vote on the issue. The size of the units ranges from 3 rooms to 6 rooms.

To pay for the new heating system, they will charge owners an annual fee that amortizes the initial costs and the ongoing maintenance costs. These ongoing annual costs are $70,000 per year. They have calculated the annual benefits, in the form of reduced heating bills, as follows:

Rooms Number of Units Annual Benefits for each unit

3 30 $280
4 65 $325
5 75 $375
6 25 $400
195 total

Assume that each owner will be perfectly rational and vote based on costs vs benefits for themselves. (As in powerpoint slide 16) Every owner whose benefits exceed their fee will vote in favor; every owner whose fee exceeds benefits will vote against.

a. The Association is considering two different options regarding how to charge the owners.

Option 1: charge owners an annual fee based on the number of rooms they have; the fee would be $80 per room.

Option 2: charge all owners the same annual fee of $359

In order to gain a majority vote, which option should the Association choose? How many would vote "yes" for option 1? How many for option 2?

b. Using the criteria of overall economic efficiency (total benefits must exceed total costs), should this project be undertaken? Calculate the total benefits of the project and compare to total costs given earlier.