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ADM-626 Public Budgeting and Financial Management
Topic 7 – Cost Benefit Analysis Worksheet
Directions: The questions below are the same question from your textbook. Please use this
document to the LoudCloud dropbox.
Module 17: Cost-Benefit Analysis
1. What is cost-benefit analysis? What are the main steps in conducting cost-benefit
analysis?
2. A city has learned that by buying larger garbage trucks, it could reduce labor costs for
garbage removal. Note: All the dollar amounts below are in this year’s dollars (constant
dollars).
a. Cost of the trucks today is \$400,000.
b. Annual savings in this year’s constant dollars is \$90,000.
c. Trucks will last for 4 years and then will be sold for \$100,000.
d. The city can borrow money at a 7% discount rate to purchase the trucks.
e. Inflation (for the next 4 years) is expected to average 3%.
f. Assuming the costs and benefits are incurred at the end of the year, should the city
3. This assignment extends the garbage truck problem from prompt 2. Two other lenders
provide alternative scenarios. Alternate lender 1 suggests that the inflation rate will be
4% and offers an interest rate of 7.5%, while alternate lender 2 suggests that the inflation
rate will be 1% and offers an interest rate of 6.5%. For all three sources, the interest rates
are guaranteed if the decision is made in the next 90 days. Which of the following
decisions should be made and why?
a. The usual lender should be used because she offers a positive NPV.
b. Alternate lender 1 should be used because he offers the highest NPV.
c. The garbage trucks shouldn’t be purchased because there is a possibility of a
negative NPV.
d. Alternate lender 2 should be used because most scenarios have a positive NPV
and she offers the highest NPV under each scenario.
e. Each solution is as good as any other.
Module 18: Life Cycle Costing
1. What is life cycle costing (LCC)? What are the main issues in applying LCC in the
government context?
2. The city administration is considering refurbishing the lighting system of its
administration building. After an initial investigation, the city procurement office has
narrowed down the choices to the following two options:
a. Option 1 is an Ergolight system that costs \$500,000 to purchase and install. The
energy cost for option 1 is \$20,000, and its maintenance cost is \$2,000.
b. Option 2 is a conventional system that costs \$100,000 to purchase and install. The
energy cost for option 2 is \$50,000, and its maintenance cost is \$10,000. Both
systems are expected to last for 20 years. Assume that the discount rate is 4% and
all future costs are paid at the end of the year.
3. Which lighting system should the city select based on LCC considerations?
Module 19: Capitalization and Depreciation
1. What are the differences in how depreciation is treated by government and by companies
in the private sector?
2. A city government purchases a new garbage truck for \$120,000 this year. It is estimated
that the truck will have a residual value of \$20,000 and a useful economic life of 20
years. What would be the depreciation expense each year if the straight-line method were
used.
3. Why do organizations, government included, not capitalize all assets that last for more
than one budgeting period, despite knowing that doing so would increase the accuracy of
the accounting of assets and operations?
4. City Hospital paid \$500,000 for a piece of advanced diagnostic equipment. The total
transportation and installation cost to make the equipment operational is \$50,000. The
staff-training cost to operate the new equipment is about \$10,000. What should be the
value of this capital asset?
Module 20: Long-Term Financing
1. Why do public organizations use municipal bonds to finance long-term capital projects?
2. A major urban center is planning to issue a \$100 million, 20-year, semiannual-interestpaying municipal bond for the construction of a stadium.
a. The interest rate is 5.875%, based on the economic and financial conditions of the
city and city government.
b. The design and issuance costs are estimated to be \$10 million and 1%,
respectively.
c. What is the total interest paid if the city decides to adopt a level debt service
structure?
d. How much will the city still owe on this bond at the end of each year?
This assignment uses a rubric. Please review the rubric prior to beginning the assignment to
become familiar with the expectations for successful completion.
You are not required to submit this assignment to LopesWrite.
This benchmark assignment assesses the following programmatic competencies: 1.5: Use
technology to manage data and organize information and 2.1: Conduct a cost benefit analysis to
determine the best allocation of public resources.