Cost Benefit Analysis
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A certain type of injury has tangible costs of $40,000 per occurrence and intangible costs of $150,000 per occurrence. Injury frequency is .05 per year but would be reducible to .01 per year with the installation of a new guarding system. Calculate the annual benefit the new system provides.

Each injury costs $40,000 + $150,000 = $190,000 each time it occurs.

Currently there are 0.05 such injuries per year (this is an average, which is why the number can be less than 1). Therefore, the average annual cost is:

($190,000)(0.05) = $9500

If a new guarding system is installed, the average number of injuries per year will fall to 0.01. Then, the average annual cost will be:

($190,000)(0.01) = $1900

The new guarding system will save, on average, $9500 - $1900 = $7600 per year.

The annual benefit that the new system provides is $7600.

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A certain company estimates that implementation of a safety glasses policy will cost $8000 per year. Eye injuries are rare in this plant, but 2 have occurred over the past five years at a cost of $50,000 each including direct costs and estimated hidden intangible costs. It is believed that the proposed safety glasses policy will reduce the hazard of eye injuries by 75%. If interest and inflation are ignored, the $20,000 actual cost is assumed to be typical of eye injury costs. Perform a cost/benefit analysis to weigh the benefits of the proposed safety glasses policy against its expected costs.

***The question has two values for the cost of eye injuries. I'm assuming $50,000 is the correct one. If it's not, just calculate the annual costs with $20,000 in place of $50,000.***

The cost of the policy is $8000 per year.

We need to calculate the benefits of implementing the policy. This will be done using the same methods as in question 4, but we have to calculate the annual frequency of the injuries ourselves.

The question tells us that there have been 2 eye injuries over the past 5 years. This is an annual frequency of 2/5 = 0.4 injuries per year. If the policy reduces the frequency of eye injuries by 75% (that is, by 0.75*0.4 = 0.3 injuries per year), there will be an annual frequency of 0.4 - 0.3 = 0.1 injuries per year.

Since, currently there are 0.4 such injuries per year, the average annual cost is:

($50,000)(0.4) = $20,000

If the policy is implemented, the average number of injuries per year will fall to 0.1. Then, the average annual cost will be:

($50,000)(0.1) = $5000

The new policy will save, on average, $20,000 - $5000 = $15,000 per year.

The annual benefit that the new system provides is $15,000, and the annual cost is $8000. Because the benefit outweighs the cost, it is worthwhile to implement the policy. In fact, the policy will save $15,000 - $8000 = $7000 per year.

***Here is a summary of what you would have gotten if you used $20,000 instead of $50,000:

Annual cost now: $8000
Annual cost under the new policy: $2000
Saved cost under the new policy: $6000

The policy costs $8000 per year, but you would only save $6000 per year, so the policy would not be worth it - it would actually lose the company $2000 per year.

please see the attached file.