PBPL Lecture 13:

Cost-Benefit Analysis (CBA) Review

• Ice Cream Example:

  • Production Cost: $3.50

    • Ingredients: $2.00

    • Labor: $0.50

    • Maintenance: $1.00

  • Selling Price: $10.00

  • Benefit-Cost Calculation: $10.00 - $3.50 = $6.50 (Decision: Produce ice cream)

Choosing Between Options

• Option 1 (Status Quo):

  • Year 0 Cost: $10,000

  • Yearly Revenue: $2,000, $4,000, $6,000 over three years

  • Net Benefit: $2,000

• Option 2 (New Speakers):

  • Year 0 Cost: $10,000

  • Yearly Revenue: $0 over two years; $8,600 Year 3

  • Net Benefit: -$1,400

Applying Benefit-Cost Ratio

• Option 1: B/C Ratio = 1.2

• Option 2: B/C Ratio = 0.86 (indicates less favorable outcome)

Projected Costs and Options for Community Pool

• Options Identified:

  • Option 1: Competition Only Pool

  • Option 2: Competition and Recreation Pools

  • Option 3: Recreation Only Pool

  • Technical Option 4: No Pool (Not favored by community)

Financials of Pool Options

• Construction Costs:

  • Option 1: $8,967,689

  • Option 2: $8,030,032

  • Option 3: $10,918,432

• Operating Costs Projections (Years 1-5):

  • Revenue and Expenses outlined for each option

Recommendations for Pool Development

1. Combine competition and recreation programming.

2. Proceed with Site Plan Option #2.

3. Consider joint ventures with nearby schools for cost recovery.

Transitioning to Multi-Attribute Analysis (MAA)

• Recognizes concerns beyond efficiency in decision-making.

• Evaluation criteria include cost, political feasibility, fairness, etc.

Sensitivity and Assumption Analysis

• Analyzes results based on best/worst-case scenarios.

• Revisit key assumptions if results are sensitive to changes.

Summary and Upcoming Events

• Familiarity with policy analysis and basic cost-benefit analysis is essential.

• Next week: Exam 2 study guide discussion and continued focus on policy analysis tools.