Question

Pause and solve Stillwater has initiated discussions on attracting rail service. A depot would need to be constructed, which would require $500,000 in land and $5.2 million in construction costs. Annual operating and maintenance costs for the facility would be $150,000, and personnel costs would be an additional $120,000. Other assorted costs would be born by the railroad and federal authorities. Annual benefits of the rail service are estimated as listed below $1,300,000 Railroad annual payments $200,000 Rail tax charged to passengers $180,000 Convenience benefits to local residents $120,000 Additional tourism dollars for Stillwater Apply the B-C ratio method, with a MARR of 8% per year and 20 year study period, to determine if the rail service should be established.

Answer 1

B-C Ratio = Present Worth of Benefits/Present Worth of Costs

Benefits

1) Railroad Annual Payments=$1300,000
2) Rail tax charges to passangers=$200,000
3) Convenience benefits to local residents=$180,000
4) Additional tourism dollars for Stilwater=$120,000

Total Annual Benefits=$1800,000

Costs=
Land Cost=$500,000
Construction Costs=$5.2 mln
Annual M&O costs=$150,000
Annual personnel costs=$120,000

Present Worth of Annual Benefits=1800,000(P/A,8%,20)

Present Worth of Costs=500,000+5200,000+270,000(P/A,8%,20)

B-C ratio=1800,000(P/A,8%,20)/(5700,000+270,000(P/A,8%,20))

(P/A,8%,20)=9.818

B-C Ratio=1800,000*(9.818)/(5700,000+270,000*9.818)=2.1162

As B-C ratio is greater than 1 therefore rail service should be established.