Reference no: EM133006334

Problem 1: What problems involving cost-benefit analysis appear in the following statements?

a. A public power project uses a discount rate of 8.5 percent, the after-tax rate of return for electric utilities in the area.

b. Evaluation of a new municipal fire station uses a discount rate equal to the rate at which the city can borrow long-term funds.

c. Evaluation of a new four-lane highway to replace an older two-lane highway shows saved travel time for truckers and for private vehicles, the value of increased gasoline sales, and increased profits of trucking firms.

d. A cost-benefit analysis of removal of architectural barriers for people with disabilities from commercial buildings produced the following benefit estimate for a 202,000-square-foot shopping center: economic benefit during fifty-year useful life of center (1975-2024) 5 $4,537,700, the cumulative gross revenues from leasable area. (This increase in gross revenue per year attributable to new accessibility to people with disabilities is calculated by multiplying gross revenues per year by the ratio of persons with disabilities to nondisabled people in the area. The estimate is based on gross revenue per leasable area experienced nationally in 1969, brought forward to 1975 by the rate of consumer price index increase, and extended through the fifty-year life of the building according to the compounded rate of growth in sales revenue experienced by community shopping centers, 1966-1969. A 7 percent discount rate is employed.)

e. A benefit-cost study done by the state Department of Environmental Management of an offshore wind power project calculates initial project cost at $811 million, but reduces that estimate by 15 percent to allow for the impact of government incentives expected to be adopted before the project actually starts construction.

f. Some studies of the Keystone Pipeline include the 5,000 to 6,000 construction jobs as a benefit of the project