Question

The transportation ministry is considering renovating a critical highway to improve service, reduce accidents, and reduce traffic congestion. The ministry is considering three mutually exclusive methods of renovation as shown in the table below. The first and the second type include resurfacing the asphalt, while the third method includes resurfacing and widening the right of way. The annual number of accidents over this highway is 280 accident with an average cost of $1,500 per accident. Annual MARR of 7%, as shown in the table below.

Route X Y Z

Initial Cost ($) in million 10.5 13.8 17.5

Maintenance Cost ($ in million) per year 1.1 1.15 2.20 Expected % reduction in number of accidents 15% 20% 30% Reduction in the daily vehicle operating costs per vehicle $5 $7 $10 Reduction in travel time (minutes) per vehicle 10 15 20 Estimated traffic volume (no. of vehicles per day in each year) 600 800 900 Value of saved time per hour $20 $20 $20

Estimated life (years) 10 15 15

a) What is the annual worth of Net Costs for methods of renovation X, Y, & Z? b) What is the annual worth of Net Benefits for methods of renovation X, Y, & Z? c) What is the BCR for methods of renovation X, Y, & Z? d) Using incremental comparison, which method of renovation is the best alternative?

Answer 1