A new transportation project is proposed to the city. This project is a form of "guide wire", where cars can hook to these moving, below-ground wires and be transported for free around town. This project is proven to reduce gas consumption by $5 million in its completion year. The city's preferred contractor says that it will take 10 years to build the thing and cost $470,000 a year, which is "perfect" because benefit would exceed costs by more than $300,000. Knowing that inflation is 3 percent, as an expert evaluator, is this a wise decision?
Convert everything to Present Value and see just how great a deal this is.
For the present value of the $5,000,000 benefit (gas reduction):
The benefit in present-day value is $3,720,469.57.
For the money (cost) being sent to the contractor, a payment of $470,000 per year, the present value would be:
The cost in present-day value is $4,009,195.33. Therefore, this detail, while shiny in appearance at first, is NOT a wise decision, since costs exceed benefits.