A city is considering four alternatives for housing development projects. Given

Question

A city is considering four alternatives for housing development projects. Given an interest rate of 10% per year and the data in the table, determine: (a) From the view point of the government which, if any, of the projects should be selected given they are independent. (b) From the viewpoint of a private operator which, if any, of the projects should be selected given they are independent. (c) From the viewpoint of the government, if the projects are mutually exclusive which project should be selected.

Explanation / Answer

B/C ratio of projects

Alternative 1= (FW of benefits-FW of disbenefits)/(FW of first cost-FW of savings)

=(20,000-6,000)/(10,000-1,500)

=14000/8500=1.65

Alternative 2=(11,000-3,000)/(10,500-2,000)

=8,000/8,500=0.94

Alternative 3=(25,000-12,000)/(18,000-10,000)

=13,000/8,000=1.625

Alternative 4=(26,000-10,000)/(12,000-3,000)

=16,000/9,000=1.77

a-Alternative 4 should be selected because it has higher B/C ratio.

b-Alternative 4 should be selected because it has higher B/C ratio.

c-Proect 4 should be selected.

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