28 The water authority for a small community argues that a n

2.8 The water authority for a small community argues that a new dam and lake are needed. and presents an initial construction cost esti- mate of $1.5 million. The authority calculates a benefit (recreation, tourism, water supply of $2 million. The community agrees to the project and floats bonds to pay for the construc- tion. As construction proceeds, however, and $1.0 million has been spent, it becomes evidernt that the dam will actually cost $3.0 million, and the extra cost is due to change orders and unforeseen problems, not a responsibility o the contractor. The half-finished dam is of no use to the community, and $1.5 million addi- tional funds are needed to finish the project. Use benefit/cost analysis to argue whether the community should continue with this project 2.9 Name one Department of Defense project that has not used the technique described in Prob- lem 2.8 to argue for its completion.

Solution

Well as the question is asked whether the project should be continued or not, let start the argument with both possibilities.

First- (Stop the project)- As $1 million already invested which will have no use as the project stopped. In this case, the whole investment turned into a loss.

Second- (Continue the project)- In this case, $1 million is already invested and an additional $2 million is needed to complete the whole project which will return $2 million (benefits by recreation, tourism, water supply). Hence the total cost goes to $3 million and $2 million will return with time. while the loss is still same as case-1 of $1 million.

Comparing both the cases, the loss is same. But it doesn\'t mean both the cases are similar. In the first case, whole investment turned into nothing while in the second case, the community will enjoy the future benefits. Of course, the wrong estimation had caused the full profitable case into a $1 million loss but the community will get an Asset which is not in case-1.