3. The Sensitivity Analysis in CBA In CBA, assumptions must be made about benefits, costs, the discount rate, and the lifetime of a project. In reality, these assumptions change. For example, in this chapter’s Sunny Village case study, the discount rate can be lower if the interest rate of the city’s long-term debt is lower. The change of assumption inevitably changes CBA results. The type of analysis that examines the impact of assumption change on CBA results is called sensitivity analysis.

1. Now, assume that the discount rate is reduced from 10 percent to 5 percent, and everything else is unchanged, conduct a CBA for Sunny Village’s Diagnostic System.

2. Conduct a CBA in which the cost of ineffective replacement increases to $65, with everything else unchanged.

3. Finally, if the city decides to purchase QTS regardless of the CBA results, but wants to extend its lifetime of use until a positive NPV is produced, how long should the city keep QTS?

Transcribed Image Text:

Table 6.4 Cost-Benefit Analysis for Two Public Infrastructure Projects ($) Year Project A Personnel Cost Operating Capital Benefit 01234567890 0 (the current year) 300,000 0 200,000 150,000 2,000 100,000 100,000 15,000 25,000 30,000 0 21,000 150,000 21,000 200,000 21,000 200,000 21,000 200,000 0 21,000 200,000 0 25,000 200,000 25,000 200,000 10 Project B 25,000 200,000 01234567890 0 (the current year) 500,000 0 125,000 0 100,000 12,500 25,000 187,500 0 25,000 0 187,500 25,000 187,500 25,000 187,500 25,000 187,500 25,000 187,500 0 25,000 187,500 0 25,000 187,500 25,000 187,500 0 25,000 187,500