Question: The Victorian government has decided that it is necessary to build a highway connecting Redhill with Dromana on the Mornington Peninsula. Route A follows the existing road and is estimated to cost $28 million initially and $250,000 per year thereafter. A new route, B, will cost $49 million initially (including land acquisition and new culverts, but only $215,000 per year thereafter in maintenance. Route C is simply an enhanced version of route B with wider lanes, shoulders, and so on. It will cost $63 million at first, plus $285,000 per year in maintenance. Relevant annual user costs are estimated to be $12/trip for route A, $7.70 per trip for route B and $6 per trip for route C. Also it is estimated that 585,000 trips will be made along this highway. In accordance with guidelines from Infrastructure Australia, a social discount factor of 7% is required for any planning for new highways.

(a) Discuss what should be included in the user benefits and disbenefits. Comment on whether these have all been allowed for in the data provided.

(b) Determine which route is preferred. Clearly show your calculation method.

(c) Discuss how sensitive your answer to (b) is to errors in the estimated costs.