You have been asked to perform a cost-benefit analysis on a new building project in a residential estate. The development company purchased the land for the estate from a farming family 10 years ago. Since then, the company has been trying to get the land rezoned from farming to residential land use. Approval to begin development has just been received. The development company will also provide the energy to the development on an ongoing basis. The company now asks you to provide a cost-benefit analysis to decide whether to proceed with the project, giving you the following information:

Item Description Estimated $ value
1 Purchase of farm land $15 million
2 Drainage and sewerage $2 million
3 Construction costs $8 million
4 Sales of houses $27 million
5 Sales from energy annually $1 million

Which items are costs and which are benefits to be included in the cost-benefit analysis?

Select a single answer.

Question

You have been asked to perform a cost-benefit analysis on a new building project in a residential estate. The development company purchased the land for the estate from a farming family 10 years ago. Since then, the company has been trying to get the land rezoned from farming to residential land use. Approval to begin development has just been received. The development company will also provide the energy to the development on an ongoing basis. The company now asks you to provide a cost-benefit analysis to decide whether to proceed with the project, giving you the following information:

Item	Description	Estimated $ value
1	Purchase of farm land	$15 million
2	Drainage and sewerage	$2 million
3	Construction costs	$8 million
4	Sales of houses	$27 million
5	Sales from energy annually	$1 million

Which items are costs and which are benefits to be included in the cost-benefit analysis?

Select a single answer.

BlackTom AI · Accepted Answer

Because the land purchase occurred 10 years ago, that $15 million is a sunk cost and should be excluded from the incremental cost–benefit decision. Only future, incremental costs and benefits that change with the decision are included.

1. Relevant knowledge points and concepts
- Sunk cost: past expenditures that cannot be recovered (exclude from analysis).
- Incremental/avoidable costs and benefits: future cash flows caused by the decision (include).
- Ongoing revenue from services (energy sales) is a benefit if it results from the project.
- Capital and operating expenditures required to implement the project are costs.

2. Complete reasoning process, step by step
- Item 1 (Purchase of farmland $15m): occurred 10 years ago; it does not change whether the company proceeds now. Exclude as sunk.
- Item 2 (Drainage and sewerage $2m): a required capital cost to develop the estate; it is an incremental cost to include.
- Item 3 (Construction costs $8m): direct incremental cost to build houses; include.
- Item 4 (Sales of houses $27m): proceeds from selling houses directly attributable to the project; include as a benefit.
- Item 5 (Sales from energy annually $1m): ongoing revenue generated by providing energy to the development; include as an incremental benefit (note: if doing present-value calculations, discount future $1m receipts accordingly).

3. Calculations / intermediate steps
- Total incremental costs (items 2 + 3) = $2m + $8m = $10m.
- Immediate benefit from house sales (item 4) = $27m.
- Net immediate cash (ignoring time value) = $27m − $10m = $17m surplus.
- Plus ongoing energy revenue = $1m per year (would be added as present value when performing full CBA).

4. Why the correct answer is correct
- The correct inclusion principle yields costs = items 2 and 3 (future project costs) and benefits = items 4 and 5 (future revenues). Item 1 is excluded as a sunk cost.

5. Why other options are incorrect (brief)
- Options including item 1 as a cost incorrectly treat a past sunk expenditure as relevant.
- Options that omit item 2 or item 5 fail to include an actual required development cost or an ongoing project benefit, respectively.
- Option listing only item 3 as a cost omits the necessary drainage/sewerage cost.

6. Conclusion
The correct classification is Costs: items 2 and 3; Benefits: items 4 and 5, matching the provided answer.

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