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Purchasing state parks

A state legislature has appropriated $15 million to purchase and prepare the property for several new state parks. Alternatives have been suggested and forecasts for acquisition, preparation and annual operating costs have been estimated and listed below for each alternative. Also listed are the forecasted annual benefits to the community in dollars.

Annual Benefits are to be computed as Net Benefits or Annual Benefits minus Annual Operating Costs. The investment is the sum of Acquisition costs and Preparation Costs.

The planning time horizon should consider the acquisition and preparation as being done in the current year and then for 20 years thereafter. The value of the park at the end of the 20 year time horizon (salvage value) can be ignored. (all numbers are in millions of dollars) Use an annual discount rate of 7% in the evaluation. Any funds left in the budget after the acquisition and preparation phase can be used for additional enhancements to the parks.

a. Using a B-C method for evaluations, determine which ones should be chosen.
b. Using a B/C method for evaluations, determine which ones should be chosen.
c. What non-financial considerations might be important?

Site Acquisition Cost Preparation Cost Annual Operating Cost Annual Benefits
1 $1.0 $3.2 $1.0 $3.0
2 $2.2 $2.3 $1.2 $2.5
3 $1.4 $0.8 $0.9 $2.0
4 $0.9 $0.7 $1.4 $3.2
5 $3.4 $3.1 $1.0 $1.0
6 $2.6 $1.4 $0.9 $1.4
7 $1.4 $1.6 $1.3 $1.5

Solution Preview

The Cost-Benefit Analysis of the new state parks is detailed in the attached Excel file. Please open the Excel file and then follow the clarifying explanations below:

Step 1. We compute the annual Net Benefits and the Initial Investment.
Annual Net Benefit = Annual Benefits minus Annual Operating Costs (Columns F = E - D)
Initial Investment = Acquisition Costs plus Preparation Costs (Columns G = B + C)

Step 2. We calculate the net present value (NPV) of the projects.
PV (present value) of the net benefits (column H) = annual benefits discounted to the present
NPV = PV of net benefits - initial investment (Columns I = H - G)

Step 3. Decision using B - C Criterion (Columns J, K, L, and M)
Based on NPV, we accept only projects with a positive NPV. Thus, projects 1, 2, 3, 4, and 6 are acceptable. Projects 5 and 7 are not acceptable, because the NPV ...

Solution Summary

The expert examines purchasing state parks. The annual benefits which are computed as Net Benefits or Annual Benefits are determined.