Question

The Town Council of Flic-en-Flac in Mauritius wonders if the town’s public beach should be kept cleaner. The Council estimates that the benefit of a cleaner beach would be a 6% increase in annual tourist spending from the current level of $2 million per year. The main cost is paying staff for picking up debris on the beach, most of which is plastic trash left by beach users. The Council estimates that 6 staff will be needed for 4 hours per day, every day of the year, and the local wage is $11 per hour. There is an initial expense of $40,000 to build a small shelter and buy equipment for the staff. If the Council uses a discount rate of 8%, is it beneficial to run this program as a 3-year pilot? (The program may or may not be continued after 3 years.) In your report for the Town Council, provide an answer to their question along with the actual B/C ratio.

Answer 1

Computation of Present Value of Cash Flow

On cost

Year	Cash flow	Present Value factor @8%	Present Value of cash flow
0	40,000	1	40,000
1	96,360	0.9259	89,220
2	96,360	0.8573	82,609
3	96,360	0.7938	76,491
Total	3,29,080		2,88,320

On benefits

Year	Cash flow	Present value factor @8%	Present value of cash flow
1	1,20,000	0.9259	1,11,108
2	1,20,000	0.8573	1,02,876
3	1,20,000	0.7938	95,256
Total	3,60,000		3,09,240

So, BC ratio (benefit-cost ratio) = 3,09,240/2,88,320

                                                   = 1.072

Since the project has a BCR greater than 1.0, the project is expected to deliver a positive net present value to a firm and its investors. So it is beneficial for the Town Council to move ahead with the plan.

Working Notes:

Wages paid = 6 staff * 4 hours * 365 days * $11 per hour = $96,360 per year

Benefits per year = 20,00,000 * 6% = $1,20,000

Pv factor calculation formula = where n = number of years