Question

The Oklahoma City Zoo has proposed adding to their Web site a major segment providing a virtual tour of the grounds and animals, suitable for both routine enjoyment and educational purposes in class rooms. Survey data indicate that this will have either a neutral or positive effect upon actual zoo attendance. The Web site will be professionally done and have an initial cost of $325,000. Upkeep, refreshing the videos, and developing videos for scientific research and entertainment will cost another $80,000 per year. The zoo is expected to be in operation for an indefinite period; however, a study period of only 10 years for the Web site is to be assumed, with only a residual (salvage) value of $60,000 for the archival value being anticipated. Interest is 10%. An estimated 100,000 persons will visit the e-zoo in the first year, increasing by 30,000 each year, and they will receive, on the average, an additional $0.80 of benefit per visit when the new area is complete. On the basis of B/C analysis, should the Web site be supported for funding?

Answer 1

B/C Ratio = PW_Benifits / PW_Costs

PW_Benifits =100000*$0.8 (P/A, 10%, 10) + 30000*$0.8(P/G, 10%, 10) +57000(P/F, 10%,10)

=80000 (P/A, 10%,10)+24000(P/G,5%,10)+60000(P/F, 10%,10)

=80000(7.722)+24000(31.652)+60000(0.6139)

=617760+759648+36834

=1414242

PW_Costs =325000+80000 (P/A, 10%, 10)

=325000+80000(7.722)

=3127410

B/C Ratio =1414242/3127410

B/C Ratio=0.4522

What is the B-C?

A benefit cost ratio (BCR) is a ratio attempting to identify the relationship between the cost and benefits of a proposed project. Benefit cost ratios are most often used in corporate finance to detail the relationship between possible benefits and costs, both quantitative and qualitative, of undertaking new projects or replacing old ones.

As mentioned, the ratio is used to measure both quantitative and qualitative factors, since sometimes benefits and costs cannot be measured exclusively in financial terms. In cases where at all possible however, qualitative factors should be translated to quantitative terms in order for the results to be easily understandable and tangible.