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CTC 475 Review

Explore the methods, objectives, and challenges of B/C ratios in public projects. Learn about flooding controls and more.

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CTC 475 Review

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  1. CTC 475 Review • Evaluating alternatives • Ranking Method (PW, AW, FW) • Incremental Method (PW, AW, FW, IRR, ERR, SIR) • Put alternatives in order of initial investment • Determine cash difference of first 2 alternatives • Determine whether incremental benefits outweigh incremental costs • Compare winner to next alternative

  2. CTC 475 Benefit-Cost Analyses

  3. Objectives Why is B/C used? How do public projects differ from private sector projects? What are the disadvantages of using B/C ratio

  4. Public Projects • Cultural development (education, historic, recreation) • Economic Services (transportation, power generation) • Natural Resources (pollution control, flood control, wildlife management) • Protection (military services, police, fire)

  5. Differences from private sector projects • Big initial costs (millions) • Long lives (50, 100 years) • Multiple-uses (lake might be used for recreation, flood control, irrigation, power generation) • Difficult to define cash flow ($ value on aesthetics?)

  6. Public projects • Standard method for evaluation is the B/C ratio Flood Control Act of 1936 – Benefits must exceed costs https://en.wikipedia.org/wiki/Flood_Control_Act_of_1936

  7. B/C ratio • Benefits-Public benefits associated with the project • Costs-Government costs associated with the project • Disbenefits-Unfavorable consequences to the public associated with the project • Many times it is difficult to quantify benefits and disbenefits.

  8. B/C Ratio Example

  9. B/C ratio? • There are no defined benefits, so you can’t directly determine B/C ratio • However, spending extra money does lower total public costs • Need to use incremental method

  10. Compare B and A (B-A) • Incremental Benefits: $16,973,000-$13,605,000=$3,368,000 per year • Incremental Costs: $1,243,000-$677,000=$566,000 per year • B/C (B-A) = 5.95 (>1) • Prefer Route B over Route A

  11. Compare C and B (C-B) • Incremental Benefits: $13,605,000-$12,678,000=$927,000 per year • Incremental Costs: $2,103,000-$1,243,000=$860,000 per year • B/C (C-B) = 1.08 (>1) • Prefer Route C over Route B

  12. Annual Worth Method

  13. Considerations • Point of view • Selecting MARR • Assessing benefit-cost factors • Overcounting • Unequal lives • Tolls & fees • Multiple-Use Projects • Problems with B/C ratio

  14. 1. Point of View • Individual • Particular government agency • Local area • Regional area • Entire nation

  15. 2. Choosing MARR Public projects are funded by taxes, bonds, tolls. Making a profit is not government’s motive: • Use zero? • Use rate paid by government for borrowed money? • Use rate that private investors use?

  16. 3. Determining Benefit-Cost Factors How far do you go in determining benefit-costs? • Short-term benefits to local economy? • Secondary benefits? • How do you put a price tag on aesthetics, wildlife, views, etc.?

  17. 4. Overcounting Must be careful and not count twice • Wages lost through disability • Company’s cost of disability insurance

  18. 5. Unequal Lives How do you calculate salvage values for public works projects?

  19. 6. Tolls, Fees and User Charges Tolls and user fees effect B/C ratio, but not necessarily B-C Example: • EUAC=$20,000 for public facility • 10,000 people per year attend facility • Person receives $3 of benefits per event

  20. Without User Fee • B/C=($3*10,000)/$20,000=1.5 • B-C=$30,000-$20,000=$10,000 per year

  21. With User Fee • Fee of $1.50 is charged • Net benefits are only $1.50 • Govt. Cost is reduced by $15,000 • Govt. Cost is $5,000 per year • B/C=($1.5*10,000)/$5,000=3 • B-C=$15,000-$5,000=$10,000 per year

  22. 7. Multiple-Use Project For incremental costs you can sometimes expand a public project to provide multiple benefits

  23. Example

  24. Use incremental analysis to Evaluate Dam for Irrigation Only versus Dam for Irrigation & Flood Control • Incremental benefits 31-25=6 • Incremental costs = 18.5-14.5=4 • Incremental B/C ratio = 1.5 • >1 means that it’s worth spending the extra money to derive both benefits

  25. Problems with B/C • Don’t make the mistake of ranking B/C ratios • In previous example, ranking would have given us the wrong answer (see next slide)

  26. Example

  27. Other Problems with B/C Ratio • Benefits/Costs must be determined objectively • Don’t play games to get the result you want

  28. Other types of Analysis • Sometimes you can’t measure a project in terms of $ alone • Reliability, performance, availability, maintainability may be important • Defense and space systems may use other methods than consideration of costs alone

  29. Next lecture • Breakeven Problems

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