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The fire chief of a medium-sized city has estimated that the initial cost of a new fire station will be $4 million. Annual upkeep costs are estimated at $300,000. Benefits to citizens of $550,000 per year and disbenefits of $90,000 per year have also been identified. Use a discount rate of 4% per year to determine if the station is economically justified by the conventional B/C ratio.

User Ziul
by
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1 Answer

4 votes

Answer: So B/C ratio = PW(B)/PW(C) =
(11500000)/(11500000)= 1

So economically there is no befit and no loss of new fire station.

Step-by-step explanation:

Net annual benefit B = Benefit-Disbenefit = 550000-90000 = 460000

I = 4000000

O&M(Annual keep up cost) = 300000

i = 0.04

As n is not given so assuming this project to be perceptual.

P.V of perpetuity =
(A)/(i)

Now;

PW(B)=tex]\frac{460000}{0.04}[/tex] = $11500000

PW (C) = I +PW
*(O&M) =
4000000+(300000)/(0.04) = $11500000

So B/C ratio =
(PW(B))/(PW(C))=
(11500000)/(11500000) = 1

So economically there is no befit and no loss of new fire station.

User Endanke
by
8.7k points
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