4. Problem 4
The city of Calgary has a new subdivision, Paradise Mountain, at its outskirts. The city wants to encourage the growth of Paradise Mountain by improving transportation between Paradise Mountain and the centre of Calgary. Two alternatives are being considered: (1) new buses on the route between Paradise Mountain and Calgary, and (2) improvement of the road between Paradise Mountain and Calgary.
Both projects will have as their main benefit improved transportation between Paradise Mountain and Calgary. Rather than measuring the value of this benefit directly to the city, engineers have estimated the benefit in terms of an increase in the value of land in Paradise Mountain. Another way to say this is that potential residents are expected to be willing to pay more for homes in Paradise Mountain, because of improved access to the city centre, so land values will increase. The road improvement will entail construction cost and increased operating and maintenance costs. In addition, the improved road will require construction of a parking garage in the centre of Calgary. The new buses will have a first cost as well as operating and maintenance costs. Information about the two alternatives is shown below.
| | New Buses | Road Improvement |
| :--- | :--- | :--- |
| First cost (capital cost) | $4,500,000 | $15,000,000 |
| PW of operating and maintenance cost | $12,000,000 | $5,000,000 |
| Parking garage cost | | $4,000,000 |
| Estimated increase in land value | $18,000,000 | $26,000,000 |
a. Compute the benefit-cost ratio of both alternatives. Is each option individually viable? Which is better?
b. Using an incremental benefit-cost ratio approach, which of the two alternatives should be chosen?
c. Compute the present worth of each of the two alternatives. Which alternative is better, based on present worth analysis?
d. Compare the decisions of which alternative is best based on the benefit-cost and present worth analyses above.
