Reference no: EM131573444

Q1. Decision making

A factory building is located in an area subject to occasional flooding by a nearby river. You have been brought in as a consultant to determine whether flood-proofing of the building is economically justified. The alternatives are as follows:

(a) Do nothing. Damage in a moderate flood is $10,000 and a severe flood $25,000.

(b) Alter the factory building at a cost of $15,000 to withstand moderate flooding without damage and to withstand severe flooding with $10,000 damage.

(c) Alter the factory building at a cost of $20,000 to withstand a severe flood without damage.

In any year the probability of flooding is as follows:

• P = 0.70 no flooding of the river
• P = 0.20 moderate flooding
• P = 0.10 severe flooding

If interest is 15% and a 15-year analysis period is used, what do you recommend?

Q2. Benefit Cost Ratio

Cornell has two options for upgrading their athletic facilities. The off-campus option costs only $20 million, but it will require frequent bus service to those facilities at an annual cost that starts at $300,000 sand increases by 4% per year (buses, drivers and mechanics salaries, maintenance, road wear, etc.). Improving the on-campus facilities will cost $50 million, but no extra transportations costs are required. Both options involve an annual estimated maintenance cost of about $1 million for 40 years before new facilities will again be needed. Using benefit-cost ratio analysis, determine which option is more economically efficient. Use an interest rate of 8% per year.