4. 7.24 You work for the New Mexico Department of Transportation (NMDOT). Two proposals to improve street safety and lighting in a colonia in south central New Mexico have been proposed.

(a) Use a B/C analysis and a discount rate of 8% per year to evaluate the proposals.

(b) (Here is a thought question.) If you reevaluate proposal 1 benefits and find them to be understated by $100,000 per year, benefits will increase from $530,000 to $630,000 per year. Now, the evaluation (1 vs. DN) will have a B/C = 1.30. There are three questions: (1) What will be the time basis of the incremental evaluation? (2) Using the comparison terminology “larger initial cost” vs. “smaller initial cost,” what will be the order of incremental comparison between the two proposals: (1 vs. 2) or (2 vs. 1)? (3) Which proposal will be selected now? Why?

Table Summary: Table divided into three columns compares two proposals for installing lightning and improving safety in a city based on the interest rate and investment. Column 1 represents the factors for comparing the proposals. Columns 2 to 3 are marked as: proposal 1 and proposal 2 shows the corresponding values. Proposal 1 Proposal 2 Initial cost, $ 900,000 1,700,000 Annual M&O costs, $ per year 120,000 60,000 Annual benefits, $ per year 530,000 650,000 Annual disbenefits, $ per year 300,000 195,000 Life, years 10 20