chapter_5_benefit cost ratio method lecture slide

Chapter 5 : Evaluating Projects with the Benefit-Cost Ratio MethodRefer Chapter 10 (Sullivans Book)

Copyright 2012 by Pearson Education, Inc.Upper Saddle River, New Jersey 07458All rights reserved.Engineering Economy, Fifteenth EditionBy William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling

The objective this chapter is to demonstrate the use of the benefit-cost ratio for the evaluation of public projects.


PROJECT EVALUATION METHOD

IntroductionProject SelectionThe Benefit-Cost Ratio Methodi. Conventional BC Ratio with PWii.Modified BC Ratio with PWiii. Conventional BC Ratio with AWiv. Modified BC Ratio with AW


Frequently much larger than private venturesThey may have multiple, varied purposes that sometimes conflictOften very long project livesCapital source is ultimately tax payersDecisions made are often politically influencedBenefits are often nonmonetary and are difficult to measuremore...



2008, McGraw-Hill All rights reserved7 - *Owned, used and financed by citizens of government units. Some examples are:HighwaysUniversitiesHospitalsSports arenasPrisonsPublic housingEmergency reliefUtilitiesPublic projects provide service to citizenry at no profitPartnerships of public entities and private enterprise are more prevalent now as funding for large public projects becomes more difficult

2008, McGraw-Hill All rights reserved


Slide to accompany Blank and Tarquin Basics of Engineering Economy, 2008 2008, McGraw-Hill All rights reserved7 - *Size: Usually large compared to private projects with initial investment distributed over several years

Life: Long-lived (often 30-50+ years); capitalized cost method is useful with A = Pi estimating annual costs

Cash flows: No profits allowed; estimates are in form of costs paid by government unit, benefits to the citizenry (can include revenues or savings), and disbenefits (descriptions on later slide)



Slide to accompany Blank and Tarquin Basics of Engineering Economy, 2008 2008, McGraw-Hill All rights reserved7 - *

Funding: Public projects use taxes, fees, bonds (and gifts) for funding; taxes and fees are collected from users of project services; funding examples are federal/state taxes of various sorts, tolls, surcharge fees.

Interest rate: Called discount rate, it is considerably lower than for private projects since no profit isconsidered and governments are exempt from taxes; typical rates in the 3 to 6% per year range

Alternative selection: Politics and special interest groups make selection more complex for public projects; B/C method developed to put more objectivity into the analysis process



Slide to accompany Blank and Tarquin Basics of Engineering Economy, 2008 2008, McGraw-Hill All rights reserved7 - *Analysis requires estimates as accurate as possible for costs, benefits, and disbenefitsDescriptionCosts: expenditures to the government to build, maintain, & operate project; salvage/sales value possibleBenefits: advantages to public; income and savingsExampleBridge construction costAnnual cost of drug abusers treatment program

New jobs and salary moneyReduced property taxesLower transportation costs due to less gas used



Slide to accompany Blank and Tarquin Basics of Engineering Economy, 2008 2008, McGraw-Hill All rights reserved7 - *Disbenefits: expected undesirable, negative consequences of project to owners the public; usually these are economic disadvantages estimable in monetary unitsDisbenefits are not always included in the analysis; subject to political and special interest argumentation



Slide to accompany Blank and Tarquin Basics of Engineering Economy, 2008 2008, McGraw-Hill All rights reserved7 - *Determine viewpoint (perspective) before costs, benefits, and disbenefits are estimated

Choose one and maintain it throughout estimation and analysis. Sample viewpoints Citizen Tax base Creation/retention of jobs Economic development Specific industry



Slide to accompany Blank and Tarquin Basics of Engineering Economy, 2008 2008, McGraw-Hill All rights reserved7 - * Traditional Construction Contract

Government funding via taxes, user fees and bondsConstructed through fixed price or cost plus contract with a profit margin specified for contractorOwned and operated by government unit

CONTRACTOR SHARES NO RISK ON FINANCING OR OPERATION



Slide to accompany Blank and Tarquin Basics of Engineering Economy, 2008 2008, McGraw-Hill All rights reserved7 - * Public-Private Partnership

Often called BOT (Build-Operate-Transfer) contractContractor partially or completely responsible for financial arrangementsContractor operates and maintains system for specified time period. Contract includes these fundsOwnership transferred to government in future. This stage is often negotiated in different waysProfit margin is specified for contractor during time of involvement



Slide to accompany Blank and Tarquin Basics of Engineering Economy, 2008 2008, McGraw-Hill All rights reserved7 - *

Public-Private Partnership

CONTRACTOR SHARES RISK ON FINANCING AND OPERATION

Examples:Design, finance construct operate nuclear power plant for 15 years Recondition and operate state hospital for mental health patientsOrganize and operate a municipal security (police) force for a 20-year period; contract renewable each 5 years



For government projects, the owners are ultimately the taxpayers.Project Benefits are favorable consequences of the project to the public (owners).Project Costs represent monetary disbursements required of the government.Disbenefits represent negative consequences of a project to the public (owners).



The consideration of the time value of money means this is really a ratio of discounted benefits to discounted costs.B-C ratio is the ratio of the equivalent worth of benefits to the equivalent worth of costs.. Conventional BC Ratio with PWModified BC Ratio with PWConventional BC Ratio with AWModified BC Ratio with AW


B = BenefitI =Investment = CR (kos tambahan modal)MV = F= Market Value at the end of useful life (nilai sisa)O & M = Operation & MaintenanceCR = Capital Recovery Amount (kos pemulihan modal, allowance, salvage value)


Conventional B-C ratio with PW ..darab dengan (P/A, i, n) kecuali IModified B-C ratio with PW ..darab dengan (P/A, i, n) kecuali IA project is acceptable when the B-C ratio is greater than or equal to one.


Conventional B-C ratio with AW ..hanya I=CR shj perlu darab dgn (A/P, i, n)Modified B-C ratio with AW .. hanya I=CR shj perlu darab dgn (A/P, i, n)


Guideline for economic justification

If B/C 1.0accept project If B/C < 1.0project not acceptable




Kerajaan negeri Johor telah bercadang untuk melebarkan dan menambah lagi landasan di lapangan terbang Senai bagi membolehkan lebih banyak kapal terbang menggunakan kemudahan di lapangan terbang tersebut. Pembesaran landasan memerlukan tanah baru bernilai RM450 000. Kos pembinaan untuk landasan tersebut dijangka bernilai RM750 000 dan kos senggaraan tahunan ialah RM 30 000 setahun. Bagi menyokong operasi, sebuah terminal kecil perlu dibina dengan kos permulaan RM80 000. Dua orang pengawal trafik udara diperlukan dengan kos tahunan ialah RM100 000 setahun bagi mengawal trafik yang semakin bertambah. Faedah tahunan yang diperoleh akibat pembesaran landasan ini disenaraikan dalam jadual berikut:


Dengan andaian landasan terbang dpt bertahan selama 30thn dan kadar faedah 10% setahun, buat penilaian cadangan tersebut dgn menggunakan kaedah nisbah B/C konvensional dan nisbah B/C terubahsuai pada nilai kesetaraan PW dan AW.

MaklumatNilai setahun (RM)Sewa ruang kpd syarikat penerbangan325 000Cukai lapangan terbang yg dikenakan kpd penumpang65 000Faedah yg dinikmati penduduk sekitar50 000Peningkatan pendapatan penduduk selaras dgn bertambahnya kedatangan pelancong50 000JUMLAH FAEDAH490 000


UTM bercadang untuk melabur sebanyak RM1.5 Juta untuk menampung satu penyelidikan tentang kaedah baru pengajaran. Projek yg mempunyai jangkahayat 15 tahun tersebut dapat menjimatkan kos gaji, yuran pelajar dan lain-lain bayaran universiti bernilai RM500 000. Universiti menggunakan kadar pulangan 6% setahun terhadap pelaburan yang dijalankan. Projek tersebut memerlukan kos operasi sebanyak RM50 000 setahun. Oleh kerana aktiviti kajian dilakukan dlm masa yg sama dgn penyelidikan yg lain, sebanyak RM200 000 telah dikurangkan drp aktiviti kajian penyelidikan yg lain. Guna analisis faedah-kos berikut utk menilai kewajaran program pembiayaan ini dlm masa 15 tahun:

Nisbah B/C konvensionalNisbah B/C TerubahsuaiNilai bersih faedah kos (B-C)


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