Cases for Studying Benefit/Cost

1. You are evaluating two projects for Urban Development Action Grants for a moderate-sized, rural city. One project, an expansion of a local business, will cost a total of $700,000. It will generate (or "leverage") $580,000 of investment from private sources, and will generate full-time, permanent, private-sector employment for 12 low-income workers and 21 middle-income workers. The second project, a downtown redevelopment package, will cost $5,593,600. It will generate $2,065,300 of investment from private sources, and will generate 85 new private-sector jobs for low-income workers and 45 for middle-income workers. For the purpose of the analysis, measure the employment benefits by the wages paid--an average of $15,000 for low-income and $25,000 for the middle-income employees.

  • Does either project produce enough benefits to justify the cost?
  • Is one project more cost-effective than the other?

2. Suppose, in the prior problem, that your agency had a preference for projects which generate new employment for low-income people (weight=2.O). Suppose, further, that the next priority was leveraging private money (weight=1.5). The third priority is providing general employment (weight=1.0). Now which project is more cost-effective?

3. Suppose two alternatives for the same project have been proposed to the Housing Redevelopment Agency in Fairmont. One alternative, costing $1,440,000 (annual debt service of $205,750), will provide 10 one-bedroom units, 25 two-bedroom units, and 5 three-bedroom units. (A one-bedroom unit rents for $325/month, a two-bedroom unit rents for $400/month~ and a three-bedroom unit rents for $475). The second project, costing $1,465,000, will provide 40 two-bedroom units. Assume that average occupancy for a one-bedroom unit is 1.3 persons; for a two-bedroom unit it is 3.0 persons; for a three-bedroom unit it is 4.2 persons.

  • Which alternative is more cost-effective for housing people? Which is more cost-effective for generating rent?
  • Suppose the city has a policy encouraging "family housing," and the weight for a three-bedroom unit is 2.0, a two-bedroom unit is weighted 1.5, and a one-bedroom unit is 1.0. Now which project is more cost-effective for housing people?

4. Chisago County maintains 371 miles of collector highway (2-lane blacktop). With current maintenance practices, a highway can be expected to last 50 years before it must be reconstructed. During that time, it should receive 5 applications of SealCoat (at 7-year intervals) and 2 applications of 3-inch overlay (at years 20 and 40). SealCoat costs $3.68 a running yard (assuming 12 feet per lane) and 3-inch overlay costs $25.76 a running yard. Omitting the SealCoat would require a new overlay in years 15 and 25, and would require reconstruction by year 35 (reconstructing the road costs $138.40 a running yard). For purposes of analysis, assume that the cost of the most expensive option is exactly equal to the benefits received from the road.

  • Ignoring the issue of discounting, does the application of SealCoat make economic sense?
  • What difference would discounting make in your conclusions?

5. Suppose you are on the staff of North-South Neighborhood Development Corporation, in the Twin Cities area. You own a property, which costs $32,800 to acquire and clear. Now you want to move a house onto the site. You could acquire a shell and move it to the site for $8,000, and then rehab the whole thing for another $50,000. You could also acquire and move a better house for $17,000, and only spend $35,000 for rehab. Or, finally, you could acquire and move a house for $40,000, with no rehab costs. The city will finance half the rehab costs, charging 0% for 1/3 of the rehab loan and 2% for the remaining 2/3 (the rest of the rehab will have to be financed from conventional sources at 9%). [As a measure of benefits, figure that a comparable house in your neighborhood would sell for $95,000.]

  • Which option do you pick?



© 1996 A.J.Filipovitch
Revised 11 March 2005