The fire chief of a mediumsized city has estimated that the

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 (a) the conventional B/C ratio and (b) the B – C difference.

Solution

Solution a)

Annual upkeep costs are estimated at $300,000

Benefits to citizens cost-$550,000

disbenefits to citizens cost - $90,000

B/C =(550000 – 90000)/300000 = 1,53

Solution b) B-C = 250000