The Oklahoma City Zoo has proposed adding to their Web site a major segment prov

Question

The Oklahoma City Zoo has proposed adding to their Web site a major segment providing a virtual tour of the grounds and animals, suitable for both routine enjoyment and educational purposes in classrooms. Survey data indicate that this will have either a neutral or positive effect upon actual zoo attendance. The Web site will be professionally done and have an initial cost of $300,000. Upkeep, refreshing the videos, and developing videos for scientific research and entertainment will cost another $76,000 per year. The zoo is expected to be in operation for an indefinite period; however, a study period of only 10 years for the Web site is to be assumed, with only a residual (salvage) value of $62,000 for the archival value being anticipated. Interest is 10%. An estimated 80,000 persons will visit the e-zoo in the first year, increasing by 29,000 each year, and they will receive, on the average, an additional $0.80 of benefit per visit when the new area is complete.

Calculate the benefit-cost ratio and benefits minus costs:

B/C=

B-C=

Explanation / Answer

Years 1 2 3 4 5 6 7 8 9 10 10 benefits 0.8 64000 87200 110400 133600 156800 180000 203200 226400 249600 272800 Residual value 62000 Discount factor @ 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.466 0.424 0.386 0.386 Present value of benefits 58176 72027 82910 91249 97373 101520 104242 105502 105830 105301 23932 Total Present value of benefits 948062 Present value of costs Year Initial cost DF @ 10% PV of Cost 0 300000 1 300000 1-10 yrs 76000 6.1445 466982 766982 B/C Ratio = Benefits / Cost = 948062 / 766982 = 1.24 B - C = Benefits - Costs = 948062 - 766982 = $       1,81,080

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