10. Exercise 17.10

The Department of Transportation wishes to choose between two alternative accident prevention programs. It has identified three benefits to be gained from such programs:

1.	Reduced property damage, both to the vehicles involved in an accident and to other property (e.g., real estate that may be damaged at the scene of an accident)
2.	Reduced injuries
3.	Reduced fatalities

The department's experts are willing to provide dollar estimates of property damage savings that are expected to accrue from any program, but they will estimate only the number of injuries and fatalities that may be averted.

The first program is relatively moderate in its costs and will be concentrated in a large city. It involves upgrading traffic signals, improving road markers, and repaving some potholed streets. Because of the concentration and value of property in the city, savings from reduced property damage are expected to be substantial. Likewise, a moderate number of traffic-related deaths and injuries could be avoided.

The second program is more ambitious. It involves straightening long sections of dangerous rural roads and installing improved guardrails. Although the property damage savings are expected to be small in relation to total cost, the reduction in traffic-related deaths and injuries should be substantial.

The following table summarizes the expected costs and payoffs of the two programs:

Year	1	2	3	4	Total
Alternative #1
Cost ($000)	200	200	100	50	550
Reduced property damage ($000)	50	100	250	100	500
Lives saved	60	40	35	25	160
Injuries prevented	500	425	300	150	1,375
Alternative #2
Cost ($000)	700	1,800	1,100	700	4,300
Reduced property damage ($000)	150	225	475	300	1,150
Lives saved	50	75	100	125	350
Injuries prevented	800	850	900	900	3,450

Assume that a 10 percent discount rate is appropriate for evaluating government programs.

The net present cost of Alternative 1 is which one below ?

• 456,390
• 3,909,091
• 3,428,523
• 500,000

and the net present cost of Alternative 2 is which one below ?

• 456,390
• 3,909,091
• 3,428,523
• 500,000

Based on the benefit-cost ratios, which alternative is more efficient in reducing property damage?

Alternative 1

Alternative 2

If the department's sole objective is to save at least 350 lives in 4 years, which alternative will cost less? (Hint: Assume that when Alternative 1 is scaled up, costs increase by the same factor.)

Alternative 1

Alternative 2