Case Problem

[Page 664 ( continued )]

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.

[Page 665]

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?

Introduction to Management Science (10th Edition)
ISBN: 0136064361
EAN: 2147483647
Year: 2006
Pages: 358

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