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The Conventional And Modified Benefit-Cost Analysis Paper
Question
In the past, the Afram Foundation has awarded many grants to improve the living and medical conditions of people in war-torn and poverty-stricken countries throughout the world. In a proposal for the foundation's board of directors to construct a new hospital and medical clinic complex in a deprived central African country, the project manager has developed some estimates. These are developed, so she states, in a manner that does not have a major negative effect on prime agricultural land or living areas for citizens. Award amount:
$20 million (end of) first year, decreasing by
$5 million per year for 3 additional years; local government will fund during the first year only Annual costs:
$2 million per year for 10 years, as proposed Benefits: Reduction of
$8 million per year in health-related expenses for citizens Dis-benefits:
$0.1 to
$0.6 million per year for removal of arable land and commercial districts Use the conventional and modified B/C methods to determine if this grant proposal is economically justified over a 10 -year study period. The foundation's discount rate is
6% per year The Conventional And Modified Benefit-Cost Analysis Paper.
Step 1/1
To determine if the grant proposal is economically justified, we will use both the conventional benefit-cost (B/C) analysis and the modified benefit-cost analysis. Conventional B/C Analysis: First, we will calculate the present value of the benefits and costs over the 10-year study period using the foundation's discount rate of 6% per year. PV(Benefits) = $8 million per year * PVIFA(6%, 10 years) = $52.52 million PV(Costs) = -$20 million + $2 million * PVIFA(6%, 10 years) = -$15.17 million PV(Net Benefits) = PV(Benefits) - PV(Costs) = $37.35 million The conventional B/C ratio is then calculated as PV(Benefits) / PV(Costs) = 3.46. Since the B/C ratio is greater than 1, the proposal is economically justified according to the conventional B/C analysis. Modified B/C Analysis: The modified B/C analysis takes into account the dis-benefits of the project. To calculate the modified B/C ratio, we need to subtract the present value of the dis-benefits from the present value of the benefits before dividing by the present value of the costs. PV(Dis-benefits) = -$0.35 million to -$2.1 million over 10 years, depending on the extent of the land and commercial district removal PV(Modified Benefits) = PV(Benefits) - PV(Dis-benefits) = $50.42 million to $52.17 million, depending on the extent of the dis-benefits PV(Modified Net Benefits) = PV(Modified Benefits) - PV(Costs) = $35.25 million to $37 million, depending on the extent of the dis-benefits The modified B/C ratio is then calculated as PV(Modified Benefits) / PV(Costs), which ranges from 3.31 to 3.44, depending on the extent of the dis-benefits. Since all of these ratios are greater than 1, the proposal is economically justified according to the modified B/C analysis as well. Both the conventional and modified benefit-cost analyses indicate that the proposal to construct a new hospital and medical clinic complex in a deprived central African country is economically justified over the 10-year study period, with B/C ratios ranging from 3.31 to 3.46. However, it is important to note that the modified analysis highlights the potential dis-benefits associated with the project, such as the removal of arable land and commercial districts. These dis-benefits should be carefully evaluated and weighed against the benefits of the project to ensure that the overall impact is positive The Conventional And Modified Benefit-Cost Analysis Paper.
Final answer
The proposal to construct a new hospital and medical clinic complex in a deprived central African country is economically justified according to both the conventional and modified benefit-cost analyses. The grant award amount is $20 million, decreasing by $5 million per year for three additional years, with the local government funding during the first year only. The annual costs are $2 million per year for ten years, as proposed. The benefits of the project include a reduction of $8 million per year in health-related expenses for citizens, while the dis-benefits are estimated to be $0.1 to $0.6 million per year for the removal of arable land and commercial districts. The foundation's discount rate is 6% per year, and the analyses indicate a B/C ratio ranging from 3.31 to 3.46, depending on the extent of the dis-benefits. It is important to carefully evaluate and weigh the dis-benefits against the benefits to ensure that the overall impact is positive. The Conventional And Modified Benefit-Cost Analysis Paper
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