Case Problem

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B ENEFIT C OST A NALYSIS OF THE S PRADLIN B LUFF R IVER P ROJECT

The U.S. Army Corps of Engineers has historically constructed dams on various rivers in the southeastern United States. Its primary instrument for evaluating and selecting among many projects under consideration is benefitcost analysis. The Corps estimates both the annual benefits deriving from a project in several different categories and the annual costs and then divides the total benefits by the total costs to develop a benefitcost ratio. This ratio is then used by the Corps and Congress to compare numerous projects under consideration and select those for funding. A benefitcost ratio greater than 1.0 indicates that the benefits are greater than the costs; and the higher a project's benefitcost ratio, the more likely it is to be selected over projects with lower ratios.

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The Corps is evaluating a project to construct a dam over the Spradlin Bluff River in southwest Georgia. The Corps has identified six traditional areas in which benefits will accrue: flood control, hydroelectric power, improved navigation, recreation, fish and wildlife, and area commercial redevelopment. The Corps has made three estimates (in dollars) for each benefita minimum possible value, a most likely value, and a maximum benefit value. These benefit estimates are as follows :

	Estimate
Benefit	Minimum	Most Likely	Maximum
Flood control	$ 1,695,200	$ 2,347,800	$ 3,570,600
Hydroelectric power	8,068,250	11,845,000	14,845,000
Navigation	50,400	64,000	109,500
Recreation	6,404,000	9,774,000	14,566,000
Fish and wildlife	104,300	255,000	455,300
Area redevelopment		1,630,000	2,385,000

There are two categories of costs associated with a construction project of this typethe total capital cost, annualized over 100 years (at a rate of interest specified by the government), and annual operation and maintenance costs. The cost estimates for this project are as follows:

		Estimate
Cost	Minimum	Most Likely	Maximum
Annualized capital cost	$12,890,750	$14,150,500	$19,075,900
Operation and maintenance	3,483,500	4,890,000	7,350,800

Using Crystal Ball, determine a simulated mean benefitcost ratio and standard deviation.

What is the probability that this project will have a benefitcost ratio greater than 1.0?