Example 1.4 in TDRM

[woodslegend]

This is regarding example 1.4 in Transportation Depth Reference Manual. Isn't the present value to be calculated based on annual costs and annual benefits (P/A instead of P/F)? Isn't it wrong to sum all the values and assume it as a future value?

 

[John QPE]

Any chance you can post the problem? Sounds like a standard Eng. Econ. problem...my fortay.

 

[Lomarandil]

Seconded.. would love to help, but I don't have the TDRM.

 

[ptatohed]

A proposal to dredge a shipping channel to a new depth

has an estimated cost of $248 million over three years,

plus $15 million per year to maintain the channel at its

new depth. The port facility served by the shipping

channel expects additional revenue of $70 million per

year to occur due to the increased access by larger cargo

ships. There is no residual value for the project. Using

an effective interest rate of 5%, what is the benefit-cost

ratio of the project over 10 years?

 

[John QPE]

I'm coming up with 2.016:1 but I'm not sure I handled the $248 mil correctly.

 

[John QPE]

FWIW ... I believe you should be using F/A .... given the annuity, convert to future worth.

I applied the 5% annuity for 10 years (12.5779) to the $70 million to get a benefit, then did the same to the $15 mil + the $248 mil for the cost .... I'm not sure about just adding in the $248 mil though???

 

[woodslegend]

Thank you all for your inputs. I think the question is missing the essential information. It says $248 over three years. How do you distribute $248 over three years to calculate the present worth of cost. ($248/3= 82.66 per end of each year? or $248 at the end of the third year?) And then, obviously, we are supposed to use P/A instead of P/F for both benefit and cost calculations. Anyway, I hope we don't get questions like these (missing info.) in the actual exam.

Thanks.

 

[woodslegend]

By the way, thanks for posting the question... ptatohed, I couldn't do it.

 

[Lomarandil]

Yup, my tendency would be to apply the $248m as a lump sum cost, and assume the "over 3 years" clause is just the writer being sloppy about rounding out the problem statement.