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Monetary Impact, Cost Benefit and Additional Benefit

1. Identify one each (1) benefit, (2) disbenefit, and (3) monetary cost that would impact each of the following projects:
a. A new electrical distribution station in a developing part of the city, with feeds from the city power plant and from a regional electrical grid
b. Annexation of an adjoining semirural area into the city limits
c. Replacement of old school buses
d. Renovation of rest stops having only picnic tables to now including clean restrooms, protected open-air shelters for picnics, designated pet-walking areas, and ample parking
e. A new stadium/coliseum for sporting events

2. A City has determined that building a new water distribution system using a new source of water would have an annual costs of $5,750,000 and annual net benefits of $4,250,000. The contentious issue is how to measure the benefits versus cost when it involves a federal government subsidy of 70% for the new system. The annual benefits (forever) are estimated at $4,250,000 and the annual operating costs are $250,000. The initial cost is estimated at $71,875,000 and the city uses a rate of 8% in their calculations.
The council members agree that the project has a very long time span and converting values to annual equivalents (perpetuities) is correct. They do not agree on how to include the government subsidy in their evaluations.
a. Determine the benefit - cost and benefit/cost ratios from a local perspective?
b. Determine the benefit - cost and Benefit/Cost values from the standpoint of an impartial citizen outside the community.

3 Lincoln Park Zoo in Chicago is considering a renovation that will improve some physical facilities at a cost of $1,800,000. Addition of new species will cost another $310,000. Additional maintenance, food, and animal care and replacement will cost $145,000 in the first year, increasing by 3 percent each year thereafter. The zoo has been in operation since 1868 and is expected to continue indefinitely; however, it is common to use a 20-year planning horizon on all new investments. Salvage value on facilities after 20 years will be 40 percent of initial cost. Interest is 7 percent. An estimated 1.5 million visits per year are made to the zoo, and the cost remains free year-round. How much additional benefit per visit, on average, must the visitors perceive to justify the renovation?

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1. Identify one each (1) benefit, (2) disbenefit, and (3) monetary cost that would impact each of the following projects:
a. A new electrical distribution station in a developing part of the city, with feeds from the city power plant and from a regional electrical grid

BENEFIT: More efficient, dependable, and stable source of electricity in a developing part of the city.

DISBENEFIT: Local industry producing non-electric based lighting products (e.g. lamps, candles, etc.) will lose demand for their products; if not totally lose their business.

MONETARY COST: The expenditures for the new plant, its facilities and equipment and other related costs for the new electrical distribution system.

b. Annexation of an adjoining semirural area into the city limits

BENEFIT: It would mean wider commercial area, giving rise for more businesses, more jobs to be generated, and more sources of income for the adjoining semi-rural area.

DISBENEFIT: Additional competitors for the industries/establishments in the city.
MONETARY COST: Cost for improving infrastructures such as roads, bridges, and other public utilities for the adjacent semirural area.

c. Replacement of old school buses

BENEFIT: Better/improved/efficient transportations facilities for the school children.

DISBENEFIT: Expectedly, replacement will be followed by a fare hike for the school children

MONETARY COST: The cost of the new school buses to be purchased, including the necessary licenses, permits, other related expenses.
d. Renovation of rest stops having only picnic tables to now including clean restrooms, protected open-air shelters for picnics, designated pet-walking areas, and ample parking

BENEFIT: Higher revenue taxes will be collected by the community/city government owing to the additional business establishments in the rest stops.

DISBENEFIT: The new rest stop would be a competitor ...

Solution Summary

Monetary impact, cost benefits and additional benefits are examined.

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