A city engineer and economic development director of Buffalo are evaluating two sites for the construction of a multipurpose sports arena. At the downtown site, the city already owns enough land for the arena. However, the land for the construction of a parking garage will cost $1 million. The wet side site is 30 kilometers from downtown, but the land will be donated by a developer who knows that an arena at this site will increase the value of the remainder of his land holdings by many times. The downtown site will have extra construction costs of $10 million because of infrastructure relocations, the parking garage, and drainage improvements. However, because of its centralized location, there will be greater attendance at most of the events held there. This will result in more revenue to vendors and local merchants in the amount of $350,000 per year. Additionally, the average attendee will not have to travel as far, resulting in annual benefits of $400,000 per year. All other costs and revenues are expected to be the same at either site. If the city uses a discount rate of 8% per year, where should the arena be constructed using the incremental benefit-cost analysis? One of the two sites must be selected. (Hint: Assume an infinite life for the public project. No need to calculate the absolute B/C ratio, since one of the two sites must be selected.)
A city engineer and economic development director of Buffalo are evaluating two sites for the construction of a multipurpose sports arena. At the downtown site, the city already owns enough land for the arena. However, the land for the construction of a parking garage will cost $1 million. The wet side site is 30 kilometers from downtown, but the land will be donated by a developer who knows that an arena at this site will increase the value of the remainder of his land holdings by many times. The downtown site will have extra construction costs of $10 million because of infrastructure relocations, the parking garage, and drainage improvements. However, because of its centralized location, there will be greater attendance at most of the events held there. This will result in more revenue to vendors and local merchants in the amount of $350,000 per year. Additionally, the average attendee will not have to travel as far, resulting in annual benefits of $400,000 per year. All other costs and revenues are expected to be the same at either site. If the city uses a discount rate of 8% per year, where should the arena be constructed using the incremental benefit-cost analysis? One of the two sites must be selected. (Hint: Assume an infinite life for the public project. No need to calculate the absolute B/C ratio, since one of the two sites must be selected.)
