If the capitalized value were $200 million in year 0 and the discount rate is correct,
Dakha should build the underground if the sum of discounted future net benefits
exceeds $200 million.
How do we calculate benefit cost if the railway adds equipment and other capital
costs during the life of the underground? E. J. Mishan (1982) favors putting capital
costs and operating costs together and entering all payments and external disec-
onomies as costs and all gross receipts and external economies as benefits. Thus, we
invest if annual net benefits (
B
−
C
), which replace
V
in Equation 11-1, are at least
zero (Gramlich 1990).
Planners be forewarned. Politicians have discovered the concept of
external
economies,
using vague references to them to support inviable steel plants, dams, or
port projects in their local districts. But even though planning agencies are generally
responsible to the political leadership, careful feasibility studies, including evidence
of the existence and the extent of externalities, can make a planning agency’s recom-
mendations difficult to override