ctc 475 review comparing alternatives comparing alternatives ranking (pw,aw,fw) ranking (pw,aw,fw)...
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CTC 475 Review CTC 475 Review
Comparing AlternativesComparing Alternatives Ranking (PW,AW,FW)Ranking (PW,AW,FW) Incremental (PW,AW,FW,IRR,ERR,SIR)Incremental (PW,AW,FW,IRR,ERR,SIR)
Supplementary AnalysesSupplementary Analyses Breakeven, Sensitivity, ProbabilityBreakeven, Sensitivity, Probability
Selecting and Selling the ProjectSelecting and Selling the Project
ObjectivesObjectives
Understand the major differences Understand the major differences between public/private projectsbetween public/private projects
Know the common errors when using Know the common errors when using B/C ratioB/C ratio
Public ProjectsPublic Projects
Cultural Development Cultural Development (education, historic, recreation)(education, historic, recreation)
Economic Services Economic Services (transportation, power generation)(transportation, power generation)
Natural Resources Natural Resources (pollution control, flood control, wildlife (pollution control, flood control, wildlife
management)management) Protection Protection
(military services, police/fire)(military services, police/fire)
Differences from Private Sector Differences from Private Sector ProjectsProjects
Big initial cost (millions)Big initial cost (millions) Long lives (>=50 years)Long lives (>=50 years) Multiple-use concept (lake—boaters, Multiple-use concept (lake—boaters,
fishermen, flood control, irrigation, fishermen, flood control, irrigation, power)power)
Difficult to define cash flows Difficult to define cash flows (recreation, aesthetics, historic, (recreation, aesthetics, historic, cultural)cultural)
Basic Steps for AnalysisBasic Steps for Analysis
1.1. Define alternativesDefine alternatives
2.2. Define planning horizonDefine planning horizon
3.3. Develop cash flow profilesDevelop cash flow profiles
4.4. Specify MARRSpecify MARR
5.5. Compare alternatives (B/C ratio)Compare alternatives (B/C ratio)
6.6. Perform supplementary analysesPerform supplementary analyses
7.7. Select preferred alternativeSelect preferred alternative
B/CB/C
B/C (same as SIR) = PW(+)/PW(-)B/C (same as SIR) = PW(+)/PW(-) B-C (present worth method)B-C (present worth method)
Use incremental analysis if using B/CUse incremental analysis if using B/C
Example of Defining Example of Defining Alternatives and Developing Alternatives and Developing
Cash Flow ProfilesCash Flow Profiles
Steps 1 and 3 (planning Steps 1 and 3 (planning horizon is the same)horizon is the same)
Example-Public ProjectExample-Public Project
Initial CostInitial Cost AnnualizeAnnualized Govt. d Govt. CostCost
Annualized Annualized Public Public CostsCosts
Route ARoute A $416,800$416,800 $676,800$676,800 $16,973,00$16,973,0000
Route BRoute B $1,023,40$1,023,4000
$1,243,40$1,243,4000
$13,605,20$13,605,2000
Route CRoute C $1,733,80$1,733,8000
$2,102,80$2,102,8000
$12,678,50$12,678,5000
ExplanationsExplanations
1.1. Annual govt. costs includes Annual govt. costs includes annualized initial cost and annual annualized initial cost and annual O&M costsO&M costs
2.2. Annual public costs are annualized Annual public costs are annualized costs for safety, time, and vehicle costs for safety, time, and vehicle operationoperation
3.3. Note that we don’t need the Note that we don’t need the planning horizon to do our analysisplanning horizon to do our analysis
Compare B & A (B-A)Compare B & A (B-A)
Incremental benefitsIncremental benefits -$13,605,00-(-$16,973,000)=$3,367,800 -$13,605,00-(-$16,973,000)=$3,367,800 Benefit because we’re reducing public Benefit because we’re reducing public
costscosts Incremental CostsIncremental Costs
$1,243,400-$676,800=$566,600$1,243,400-$676,800=$566,600 Incremental B/CIncremental B/C
$3,367,800/$566,600=5.9$3,367,800/$566,600=5.9 Spending the extra money to lower public Spending the extra money to lower public
costs is economically feasiblecosts is economically feasible
Compare C & B (C-B)Compare C & B (C-B)
Incremental benefitsIncremental benefits -$12,678,500-(-$13,605,200)=$926,700 -$12,678,500-(-$13,605,200)=$926,700 Benefit because we’re reducing public Benefit because we’re reducing public
costscosts Incremental CostsIncremental Costs
$2,102,800-$1,243,400=$859,400$2,102,800-$1,243,400=$859,400 Incremental B/CIncremental B/C
$926,700/$859,400=1.08$926,700/$859,400=1.08 Spending the extra money for Alt. C to Spending the extra money for Alt. C to
lower public costs is economically feasiblelower public costs is economically feasible
Use Ranking (AW)Use Ranking (AW)
RouteRoute Total Annual Total Annual CostsCosts
RankRank
AA $17,649,800$17,649,800 33
BB $14,848,600$14,848,600 22
CC $14,781,300$14,781,300 11
ConsiderationsConsiderations
Point of viewPoint of view Selecting the MARRSelecting the MARR Over-countingOver-counting Unequal livesUnequal lives Tolls & feesTolls & fees Multiple-use ProjectsMultiple-use Projects Problems w/ B/C ratioProblems w/ B/C ratio
Point of ViewPoint of View
IndividualIndividual Particular govt. organizationParticular govt. organization Local AreaLocal Area Regional AreaRegional Area Entire nationEntire nation
Selecting the MARRSelecting the MARR
Use zero for tax moneyUse zero for tax money Use society’s time preference rateUse society’s time preference rate Use rate paid by govt. for borrowed Use rate paid by govt. for borrowed
moneymoney Opportunity cost for private investorsOpportunity cost for private investors Opportunity costs foregone by govt. Opportunity costs foregone by govt.
agenciesagencies
OvercountingOvercounting
For public projects it’s easy to count For public projects it’s easy to count something twicesomething twice Calculate wages lost (individual Calculate wages lost (individual
viewpoint)viewpoint) Put $ on disability accidents (company’s Put $ on disability accidents (company’s
viewpoint)viewpoint)
Unequal LivesUnequal Lives
Planning horizon usually coincides Planning horizon usually coincides with the longest-lived alternativewith the longest-lived alternative
If shortest life is chosen it is difficult If shortest life is chosen it is difficult to put a $ value on residual (salvage) to put a $ value on residual (salvage) value for the projects w/ the longer value for the projects w/ the longer liveslives
Tolls, Fees and User ChargesTolls, Fees and User Charges
Tolls, fees and user charges impact Tolls, fees and user charges impact the B/C ratio (but not B-C)the B/C ratio (but not B-C)
Multiple-Use ProjectsMultiple-Use Projects
For incremental costs a public project For incremental costs a public project can be expanded to provide multiple can be expanded to provide multiple benefitsbenefits
Each project alone may not have Each project alone may not have been economically feasiblebeen economically feasible
Problems w/ B/C RatioProblems w/ B/C Ratio
Difficult to determine whether there Difficult to determine whether there is a benefit to the public or a cost is a benefit to the public or a cost savings to the governmentsavings to the government
Also, is it a disbenefit or an actual Also, is it a disbenefit or an actual cost?cost?
Affect’s B/C ratio but not B-CAffect’s B/C ratio but not B-C
Other AnalysesOther Analyses
Money alone is sometimes not the Money alone is sometimes not the only considerationonly consideration ReliabilityReliability PerformancePerformance AvailabilityAvailability MaintainabilityMaintainability
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