Question

8.1 A local government is considering promoting tourism in the city. It will cost $5,000 to develop a plan. The anticipated annual benefits and costs are as follows: Annual benefits: Increased local income and tax collections $117,400 Annual support service: Parking lot expansion, rest room, patrol car, and street repair $48,830 If the city government uses a discount rate of 6% and a study period of five years, is this tourism project justifiable according to the benefit–cost analysis?

Answer 1

This tourism project is justifiable.

Step-by-step explanation:

Present value of benefits:

`=(117,400)/((1.06)) +(117,400)/((1.06)^(2) ) +(117,400)/((1.06)^(3) ) +(117,400)/((1.06)^(4) ) +(117,400)/((1.06)^(5) )`

= $494,531.51

Present value of costs:

`=5,000+(48,830)/((1.06)) +(48,830)/((1.06)^(2) ) +(48,830)/((1.06)^(3) ) +(48,830)/((1.06)^(4) ) +(48,830)/((1.06)^(5) )`

= $210,689.72

Benefit to cost ratio:

`=(Present\ value\ of\ benefits)/(Present\ value\ of\ costs)`

`=(494,531.51)/(210,689.72)`

= 2.35

Benefit to cost ratio > 1 ,

Therefore, this tourism project is justifiable.