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?

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