A City has determined that building a new water distribution system using a new source of water would have an annual costs of $5,750,000 and annual net benefits of $4,250,000. The contentious issue is how to measure the benefits versus cost when it involves a federal government subsidy of 70% for the new system. The annual benefits (forever) are estimated at $4,250,000 and the annual operating costs are $250,000. The initial cost is estimated at $71,875,000 and the city uses a rate of 8% in their calculations.
The council members agree that the project has a very long time span and converting values to annual equivalents (perpetuities) is correct. They do not agree on how to include the government subsidy in their evaluations.
a. Determine the benefit - cost and benefit/cost ratios from a local perspective?
b. Determine the benefit - cost and Benefit/Cost values from the standpoint of an impartial citizen outside the community.