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    Cost Benefit Analysis

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    A certain type of injury has tangible costs of $40,000 per occurrence and intangible costs of $150,000 per occurrence. Injury frequency is .05 per year but would be reducible to .01 per year with the installation of a new guarding system. Calculate the annual benefit the new system provides.

    A certain company estimates that implementation of a safety glasses policy will cost $8000 per year. Eye injuries are rare in this plant, but 2 have occurred over the past five years at a cost of $50,000 each including direct costs and estimated hidden intangible costs. It is believed that the proposed safety glasses policy will reduce the hazard of eye injuries by 75%. If interest and inflation are ignored, the $20,000 actual cost is assumed to be typical of eye injury costs.

    Perform a cost/benefit analysis to weigh the benefits of the proposed safety glasses policy against its expected costs.

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    Solution Preview

    Cost Benefit Analysis
    ________________________________________

    A certain type of injury has tangible costs of $40,000 per occurrence and intangible costs of $150,000 per occurrence. Injury frequency is .05 per year but would be reducible to .01 per year with the installation of a new guarding system. Calculate the annual benefit the new system provides.

    Each injury costs $40,000 + $150,000 = $190,000 each time it occurs.

    Currently there are 0.05 such injuries per year (this is an average, which is why the number can be less than 1). Therefore, the average annual cost is:

    ($190,000)(0.05) = $9500

    If a new guarding system is installed, the average number of injuries per year will fall to 0.01. Then, the average annual cost will be:

    ($190,000)(0.01) = $1900

    The new guarding system will ...

    $2.19