Benefit Cost Analysis Questions and Answers

Answer: A

Correct answer: raising the discount rate

A higher rate discounts the benefits, which mostly arrive later, more heavily than the first cost, which is incurred at once - so the ratio falls. The other three all raise it: valuing time more highly or extending the life increases the numerator, and cheaper land reduces the denominator.

Answer: B

Conventional and modified ratios differ whenever disbenefits exist, so the figure cannot be checked or compared with another study. Both cross unity together, so the decision is safe even though the number is ambiguous.

Answer: C

The extra expenditure buys more than its own worth in benefit, so it is justified even though the dearer scheme's overall ratio is the lower of the two. Ranking by individual ratio would have picked the smaller scheme.

Answer: D

Benefits exceeding costs is the same statement as their difference being positive, so the two criteria accept and reject identically. They can still rank a set of alternatives differently, which is why increments must be examined.

Answer: A

Correct answer: both the assertion and the reason offered are false

A before-and-after comparison attributes to the project everything else that changed over the period - traffic growth, income, the economic cycle. The correct measure is with-project against without-project over the same period, which is why a control or a counterfactual forecast is needed. The reason states the very assumption that fails.

Answer: B

Correct answer: avoids valuing the benefit but cannot judge worth

This is the trade the method makes. Not having to price the outcome is exactly what makes cost effectiveness usable for health, safety and defence, where valuation is contentious or impossible. The price of that convenience is that it can rank alternatives but cannot say whether any of them is worth its cost.

Answer: C

Correct answer: the agency's operation and maintenance spending

The denominator of the conventional ratio holds the sponsor’s costs and nothing else. Noise and lost farmland are disbenefits, subtracted in the numerator, and time saved is a benefit added there - so the maintenance spending is the only one of the four belonging below the line.