Problem Set #11

Cost Effectiveness Analysis

In cost effectiveness analysis a decision on what to do must consider a constraint of some type.Typically, in public and non-profit organizations, the constraint is money (a fixed budget) to be spent for a particular purpose.The goal is to spend the money for that purpose in a way that maximizes benefits.

A city is considering a number of different sites for the construction of new tennis courts.It will finance the new tennis courts with a general obligation bond of $1.25 million, the most that can be spent on land, tennis court construction, and other construction expenses.The city manager investigates seven possible sites and arrives at the following estimates for costs and benefits.Use is likely to vary considerably across sites based on the size and location of the neighborhoods serviced by the courts.The tennis courts will become part of the park system.

Benefit Estimates

land purchase

tennis courts

other const

hrs/day/site

days/year

$/hour

site 1

100000

110000

63000

3

150

12

site 2

177000

110000

57000

7

150

12

site 3

160000

110000

75000

12

150

12

site 4

140000

110000

47000

14

150

12

site 5

148000

110000

33000

8

150

12

site 6

200000

110000

89000

4

150

12

site 7

230000

110000

79000

6

150

12

a.(15 points) Given the constraint that only $1.25 million can be spent, what sites should be chosen.[Hint:First calculate the efficiency or benefit/cost ratio of each site.}