Antonio County is assessing whether it should build a new correctional facility for nonviolent offenders. Currently offenders are housed in the county jail at a cost per inmate of approximately $52,000 per year.
The new facility would cost $4 million to construct.
However, inasmuch as inmates would be housed in dormitories rather than cells and the need for supervision would be reduced, the cost per inmate could be reduced to $43,000 per year.
The county estimates that if the new facility were constructed, it could accommodate 100 inmates who would otherwise be housed in the jail.
The county assesses all capital projects using a discount rate of 8 percent and uses a time horizon of ten years to evaluate proposals, such as that for the new facility, for which useful lives are indeterminate.
1. Determine the present value of the net savings that would result from undertaking the proposed project.
2. Calculate a benefit-cost ratio. Based on the limited amount of data provided, should the project be under taken? Explain.