Benefit Cost Analysis Questions and Answers

Answer: C

Correct answer: 6 million

\[ 200{,}000 \times 30 = 6{,}000{,}000. \] Halving the value of time halves the benefit, since the benefit is directly proportional to it. The sensitivity is worth noticing: the value of time is a shadow price and is among the least certain figures in a transport appraisal, yet it usually dominates the benefit side.

Answer: D

Correct answer: 1.15

\[ \frac{52 - 6}{40} = \frac{46}{40} = 1.15. \] The displacement of residents is a disbenefit - a loss falling on the public rather than an expenditure by the agency - so under the conventional form it is subtracted in the numerator, not added to the 40 million below.

Answer: A

Correct answer: 0.75

\[ \frac{14 - 11}{12 - 8} = \frac{3}{4} = 0.75. \] The four million of extra spending buys only three million of extra benefit, so the third alternative is rejected in favour of the second. Note that the third still has an overall ratio of 14/12, or 1.17, and would look acceptable on that figure alone - which is exactly why increments are examined.

Answer: B

Three million of extra cost buys four million of extra benefit, so the increment passes and the second alternative displaces the first as defender. Combined with the failed third increment, the second is the recommendation.

Answer: C

Dividing the cost by the outcome gives the cost per unit of effectiveness, which can be compared with other life-saving programmes. It cannot say whether 200 000 a life is worth paying, which is the method's limitation.

Answer: D

Correct answer: 1-Q, 2-R, 3-P

Three items in three different places. Time saved by users is a benefit to the public and goes in the numerator. Noise imposed on residents is a loss to the public and is subtracted in the numerator as a disbenefit. And maintenance spending is an outlay by the agency, so it belongs in the denominator as a cost.

Answer: A

Correct answer: 1-Q, 2-P, 3-R

Each method answers a different question. Benefit cost analysis requires the benefits to be expressible in money and then says whether the project is worth doing. Cost effectiveness applies where they are not, and compares ways of achieving a given outcome. And incremental analysis is the technique for choosing among mutually exclusive alternatives once either measure is available.

Answer: B

Identify the effects, value them, compute the ratio and then test how firm the answer is. The sensitivity test comes last because it re-runs the whole computation with the contested inputs varied over their plausible ranges.

Answer: C

Correct answer: 1 and 3 only are correct

Statements 1 and 3 are correct: unity corresponds to a zero present worth, and a ranking by ratio ignores scale. Statement 2 is false - the conventional and modified forms place disbenefits differently and give different numbers, which is precisely why the convention used must be stated.

Answer: D

Correct answer: the agency's expenditure on construction

Construction spending is a cost borne by the sponsor and belongs in the denominator. The other three are losses imposed on the public without any agency payment, which is what makes them disbenefits. Confusing the two categories changes the ratio, though not the accept-or-reject decision.