Financial Decision Making: Cost-Benefit Analysis in Projects

This lecture discusses the financial implications of undertaking projects through cost-benefit analysis. It begins with a scenario where a town considers consolidation work to save on future construction costs. The instructor explains how to evaluate whether the town should proceed with the investment based on the interest rate at which it can borrow funds. The break-even interest rate is calculated, demonstrating that if borrowing costs exceed this rate, the project is not financially viable. The discussion then shifts to a proposed flower garden project, where the instructor analyzes the benefits against the costs, emphasizing the importance of understanding the required rate of return for public projects. The lecture highlights the complexities involved in public investment decisions, including human resource limitations and safety considerations. The instructor concludes by discussing how public authorities assess the value of life in cost-benefit analyses, particularly in safety-related projects, and the challenges in determining appropriate rates of return for various investments.