bLa01293_ch07_160-181 8/25/07 10:44 AM Page 160

7 Chapter

Benefit/Cost Analysis and

Public Sector Projects

PhotoLink/Getty Images

he evaluation methods of previous chapters are usually applied to alternatives in

T the private sector, that is, for-profit and not-for-profit corporations and busi-
nesses. This chapter introduces public sector alternatives and their economic
consideration. Here the owners and users (beneficiaries) are the citizens of the gov-
ernment unit—city, county, state, province, or nation. There are substantial differences
in the characteristics of public and private sector alternatives and their economic eval-
uation. Partnerships of the public and private sector have become increasingly com-
mon, especially for large infrastructure construction projects such as major highways,
power generation plants, water resource developments, and the like.
The benefit/cost (B/C) ratio was developed, in part, to introduce objectivity into
the economic analysis of public sector evaluation, thus reducing the effects of poli-
tics and special interests. The different formats of B/C analysis are discussed. The
B/C analysis can use equivalency computations based on PW, AW, or FW values.
160
bLa01293_ch07_160-181 8/26/07 2:21 AM Page 161

Objectives
Purpose: Understand public sector economics; evaluate alternatives using the benefit/cost
ratio method.

Public sector 1. Identify fundamental differences between public and

private sector alternatives.

B/C for single project 2. Use the benefit/cost ratio to evaluate a single project.

Alternative selection 3. Select the best of two or more alternatives using the
incremental B/C ratio method.

Spreadsheets 4. Use a spreadsheet to perform B/C analysis of one or more

alternatives.

161
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 162

162 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

7.1 PUBLIC VERSUS PRIVATE SECTOR PROJECTS

Public sector projects are owned, used, and financed by the citizenry of any gov-
ernment level, whereas projects in the private sector are owned by corporations,
partnerships, and individuals. Virtually all the examples in previous chapters have
been from the private sector. Notable exceptions occur in Chapters 4 and 5 where
capitalized cost was introduced for long-life alternatives and perpetual investments.
Public sector projects have a primary purpose to provide services to the citizenry
for the public good at no profit. Areas such as health, safety, economic welfare, and
utilities comprise a majority of alternatives that require engineering economic analy-
sis. Some public sector examples are

Hospitals and clinics Transportation: highways, bridges,

Parks and recreation waterways
Utilities: water, electricity, gas, Police and fire protection
sewer, sanitation Courts and prisons
Schools: primary, secondary, Food stamp and rent relief programs
community colleges, universities Job training
Economic development Public housing
Convention centers Emergency relief
Sports arenas Codes and standards

There are significant differences in the characteristics of private and public sector
alternatives.

Characteristic Public Sector Private Sector

Size of investment Larger Some large; more medium to small

Often alternatives developed to serve public needs require large initial investments,
possibly distributed over several years. Modern highways, public transportation
systems, airports, and flood control systems are examples.

Life estimates Longer (30–50 years) Shorter (2–25 years)

The long lives of public projects often prompt the use of the capitalized cost
method, where infinity is used for n and annual costs are calculated as A  P(i).

Annual cash flow No profit; costs, benefits, Revenues contribute

estimates and disbenefits are estimated to profits; costs are estimated

Public sector projects (also called publicly owned) do not have profits; they
do have costs that are paid by the appropriate government unit; and they bene-
fit the citizenry. Public sector projects often have undesirable consequences
bLa01293_ch07_160-181 8/26/07 2:21 AM Page 163

7.1 Public versus Private Sector Projects 163

(disbenefits). It is these consequences that can cause public controversy about

the projects, because benefits to one group of taxpayers might be disbenefits to
other taxpayers, as discussed more fully below. To perform an economic analy-
sis of public alternatives, the costs (initial and annual), the benefits, and the
disbenefits, if considered, must be estimated as accurately as possible in mone-
tary units.
Costs—estimated expenditures to the government entity for construction,
operation, and maintenance of the project, less any expected salvage value.
Benefits—advantages to be experienced by the owners, the public. Benefits
can include income and savings.
Disbenefits—expected undesirable or negative consequences to the owners
if the alternative is implemented. Disbenefits may be indirect economic
disadvantages of the alternative.
In many cases, it is difficult to estimate and agree upon the economic impact
of benefits and disbenefits for a public sector alternative. For example, assume
a short bypass around a congested traffic area is recommended. How much will
it benefit a driver in dollars per driving minute to be able to bypass five traffic
lights, as compared to stopping at an average of two lights for 45 seconds each?
The bases and standards for benefits estimation are always difficult to establish
and verify. Relative to revenue cash flow estimates in the private sector, bene-
fit estimates are much harder to make, and they vary more widely around uncer-
tain averages. And the disbenefits that accrue from an alternative are harder to
estimate.
The examples in this chapter include straightforward identification of bene-
fits, disbenefits, and costs. However, in actual situations, judgments are subject
to interpretation, particularly in determining which elements of cash flow should
be included in the economic evaluation. For example, improvements to the con-
dition of pavement on city streets might result in fewer accidents, an obvious
benefit to the taxpaying public. But fewer damaged cars and personal injuries
mean less work and money for auto repair shops, towing companies, car dealer-
ships, doctors and hospitals—also part of the taxpaying public. It may be neces-
sary to take a limited viewpoint, because in the broadest viewpoint benefits are
usually offset by approximately equal disbenefits.

Funding Taxes, fees, bonds, private funds Stocks, bonds, loans,

individual owners

The capital used to finance public sector projects is commonly acquired from taxes,
bonds, fees, and gifts from private donors. Taxes are collected from those who are
the owners—the citizens (e.g., gasoline taxes for highways are paid by all gaso-
line users). This is also the case for fees, such as toll road fees for drivers. Bonds
are often issued: municipal bonds and special-purpose bonds, such as utility dis-
trict bonds.
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 164

164 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

Interest rate Lower Higher, based on market cost of capital

The interest rate for public sector projects, also called the discount rate, is
virtually always lower than for private sector alternatives. Government agencies
are exempt from taxes levied by higher-level government units. For example,
municipal projects do not have to pay state taxes. Also, many loans are govern-
ment subsidized and carry low interest rates.

Selection criteria Multiple criteria Primarily based on MARR

Multiple categories of users, economic as well as noneconomic interests, and special-

interest political and citizen groups make the selection of one alternative over
another much more difficult in public sector economics. Seldom is it possible to
select an alternative on the sole basis of a criterion such as PW or ROR. Multiple
attribute evaluation is discussed further in Appendix C.

Environment of the evaluation Politically inclined Primarily economic

There are often public meetings and debates associated with public sector projects.
Elected officials commonly assist with the selection, especially when pressure is
brought to bear by voters, developers, environmentalists, and others. The selection
process is not as “clean” as in private sector evaluation.
The viewpoint of the public sector analysis must be determined before cost,
benefit, and disbenefit estimates are made. There are always several viewpoints that
may alter how a cash flow estimate is classified. Some example viewpoints are the
citizen; the tax base; number of students in the school district; creation and reten-
tion of jobs; economic development potential; or a particular industry interest. Once
established, the viewpoint assists in categorizing the costs, benefits, and disbene-
fits of each alternative.

EXAMPLE 7.1 The citizen-based Capital Improvement Projects (CIP) Committee for the city
of Dundee has recommended a $25 million bond issue for the purchase of
greenbelt/floodplain land to preserve low-lying green areas and wildlife habitat.
Developers oppose the proposal due to the reduction of available land for
commercial development. The city engineer and economic development director
have made preliminary estimates for some obvious areas over a projected 15-year
planning horizon. The inaccuracy of these estimates is made very clear in a
report to the Dundee City Council. The estimates are not yet classified as costs,
benefits, or disbenefits.
bLa01293_ch07_160-181 9/6/07 10:00 PM Page 165

7.1 Public versus Private Sector Projects 165

Economic Dimension Estimate

1. Annual cost of $5 million in bonds over $ 300,000 (years 1–14)

15 years at 6% bond interest rate $5,300,000 (year 15)
2. Annual maintenance, upkeep, $ 75,000 ⫹ 10% per year
and program management
3. Annual parks development budget $ 500,000 (years 5–10)
4. Annual loss in commercial development $2,000,000 (years 8–10)
5. State sales tax rebates not realized $ 275,000 ⫹ 5% per year (years 8 on)
6. Annual municipal income from park $ 100,000 ⫹ 12% per year (years 6 on)
use and regional sports events
7. Savings in flood control projects $ 300,000 (years 3–10)
$1,400,000 (years 11–15)
8. Property damage (personal and city) $ 500,000 (years 10 and 15)
not incurred due to flooding

Identify different viewpoints for an economic analysis of the proposal, and clas-
sify the estimates accordingly.
Solution
There are many perspectives to take; three are addressed here. The viewpoints
and goals are identified and each estimate is classified as a cost, benefit, or
disbenefit. (How the classification is made will vary depending upon who
does the analysis. This solution offers only one logical answer.)
Viewpoint 1: Citizen of the city. Goal: Maximize the quality and wellness of
citizens with family and neighborhood as prime concerns.
Costs: 1, 2, 3 Benefits: 6, 7, 8 Disbenefits: 4, 5
Viewpoint 2: City budget. Goal: Ensure the budget is balanced and of sufficient
size to fund rapidly growing city services.
Costs: 1, 2, 3, 5 Benefits: 6, 7, 8 Disbenefits: 4
Viewpoint 3: Economic development. Goal: Promote new commercial and indus-
trial economic development for creation and retention of jobs.
Costs: 1, 2, 3, 4, 5 Benefits: 6, 7, 8 Disbenefits: none
If the analyst favors the economic development goals of the city, commercial
development losses (4) are considered real costs, whereas they are undesirable
consequences (disbenefits) from the citizen and budget viewpoints. Also, the loss
of sales tax rebates from the state (5) is interpreted as a real cost from the budget
and economic development perspectives, but as a disbenefit from the citizen
viewpoint.
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 166

166 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

Increasingly, large public sector projects are developed through public-private

partnerships. This is the trend in part because of the greater efficiency of the pri-
vate sector and in part because full funding is not possible using traditional means
of government financing—fees, taxes, and bonds. Examples of these projects are
major highways, tunnels, airports, water resources, and public transportation. In
these joint ventures, the government cannot make a profit, but the corporate part-
ner can realize a reasonable profit.
Historically, public projects are designed for and financed by a government unit
with a contractor doing the construction under either a fixed price (lump sum) or cost
plus (cost reimbursement) contract with a profit margin specified. Here the contractor
does not share the risk of success with the government “owner.” When a partnership
of public and private interests is developed, the project is commonly contracted under
an arrangement called build-operate-transfer (BOT), which may also be referred to as
BOOT, where the first O is for own. The BOT-administered project may require that
the contractor be responsible partially or completely for design and financing, and
completely responsible for the construction (the build element), operation (operate),
and maintenance activities for a specified number of years. After this time period, the
owner becomes the government unit when the title of ownership is transferred (trans-
fer) at no or very low cost. Many of the projects in international settings and in devel-
oping countries utilize the BOT form of partnership.
A variation of the BOT/ BOOT method is BOO (build-own-operate), where the
transfer of ownership never takes place. This form of partnership is used when the
project has a relatively short life or the technology deployed is changing quickly.

7.2 BENEFIT/COST ANALYSIS OF A SINGLE PROJECT

The benefit/cost ratio, a fundamental analysis method for public sector projects, was
developed to introduce more objectivity into public sector economics. It was developed
in response to the U.S. Flood Control Act of 1936. There are several variations of the
B/C ratio; however, the basic approach is the same. All cost and benefit estimates must
be converted to a common equivalent monetary unit (PW, AW, or FW) at the discount
rate (interest rate). The B/C ratio is then calculated using one of these relations:
PW of benefits AW of benefits FW of benefits
B/C    [7.1]
PW of costs AW of costs FW of costs
The sign convention for B/C analysis is positive signs, so costs are preceded by
a  sign. Salvage values, when they are estimated, are subtracted from costs. Dis-
benefits are considered in different ways depending upon the model used. Most
commonly, disbenefits are subtracted from benefits and placed in the numerator.
The different formats are discussed below. The decision guideline for a single proj-
ect is simple:
If B/C  1.0, accept the project as economically acceptable for the esti-
mates and discount rate applied.
If B/C  1.0, the project is not economically acceptable.
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 167

7.2 Benefit/Cost Analysis of a Single Project 167

The conventional B/C ratio is the most widely used. It subtracts disbenefits
from benefits.
benefits  disbenefits BD
B/C   [7.2]
costs C
The B/C value would change considerably were disbenefits added to costs. For
example, if the numbers 10, 8, and 5 are used to represent the PW of benefits, dis-
benefits, and costs, respectively, Equation [7.2] results in B/C  (10  8)兾5 
0.40. The incorrect placement of disbenefits in the denominator results in B/C 
10兾(8  5)  0.77, which is approximately twice the correct B/C value. Clearly,
then, the method by which disbenefits are handled affects the magnitude of the B/C
ratio. However, no matter whether disbenefits are (correctly) subtracted from the
numerator or (incorrectly) added to costs in the denominator, a B/C ratio of less
than 1.0 by the first method will always yield a B/C ratio less than 1.0 by the sec-
ond method, and vice versa.
The modified B/C ratio places benefits (including income and savings), dis-
benefits, and maintenance and operation (M&O) costs in the numerator. The
denominator includes only the equivalent PW, AW, or FW of the initial investment.
benefits  disbenefits  M&O costs
Modified B/C  [7.3]
initial investment
Salvage value is included in the denominator with a negative sign. The modified
B/C ratio will obviously yield a different value than the conventional B/C method.
However, as discussed above with disbenefits, the modified procedure can change
the magnitude of the ratio but not the decision to accept or reject the project.
The benefit and cost difference measure of worth, which does not involve a
ratio, is based on the difference between the PW, AW, or FW of benefits (includ-
ing income and savings) and costs, that is, B  C. If (B  C)  0, the project is
acceptable. This method has the advantage of eliminating the discrepancies noted
above when disbenefits are regarded as costs, because B represents net benefits.
Thus, for the numbers 10, 8, and 5 the same result is obtained regardless of how
disbenefits are treated.
Subtracting disbenefits from benefits: B  C  (10  8)  5  3
Adding disbenefits to costs: B  C  10  (8  5)  3

The Ford Foundation expects to award $15 million in grants to public high schools EXAMPLE 7.2
to develop new ways to teach the fundamentals of engineering that prepare stu-
dents for university-level material. The grants will extend over a 10-year period
and will create an estimated savings of $1.5 million per year in faculty salaries
and student-related expenses. The Foundation uses a discount rate of 6% per year.
This grants program will share Foundation funding with ongoing activities,
so an estimated $200,000 per year will be removed from other program funding.
bLa01293_ch07.qxd 8/13/09 4:01 PM Page 168

168 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

To make this program successful, a $500,000 per year operating cost will be
incurred from the regular M&O budget. Use the B/C method to determine if the
grants program is economically justified.
Solution
Use annual worth as the common monetary equivalent. For illustration only, all
three B/C models are applied.
AW of investment cost. $15,000,000(A兾P,6%,10) ⫽ $2,038,050 per year
AW of M&O cost. $500,000 per year
AW of benefit. $1,500,000 per year
AW of disbenefit. $200,000 per year
Use Equation [7.2] for conventional B/C analysis, where M&O is placed in the
denominator as an annual cost. The project is not justified, since B/C ⬍ 1.0.
1,500,000 ⫺ 200,000 1,300,000
B/C ⫽ ⫽ ⫽ 0.51
2,038,050 ⫹ 500,000 2,538,050
By Equation [7.3] the modified B/C ratio treats the M&O cost as a reduc-
tion to benefits.
1,500,000 ⫺ 200,000 ⫺ 500,000
Modified B/C ⫽ ⫽ 0.39
2,038,050
For the (B ⫺ C) model, B is the net benefit, and the annual M&O cost is
included with costs.
B ⫺ C ⫽ (1,500,000 ⫺ 200,000) ⫺ (2,038,050 ⫺ 500,000)
⫽ $⫺1.24 million

7.3 INCREMENTAL B/C EVALUATION OF TWO OR

MORE ALTERNATIVES
Incremental B/C analysis of two or more alternatives is very similar to that for
incremental ROR analysis in Chapter 6. The incremental B/C ratio, ⌬B/C, between
two alternatives is based upon the PW, AW, or FW equivalency of costs and ben-
efits. Selection of the survivor of pairwise comparison is made using the follow-
ing guideline:
If ⌬B/C ⱖ 1, select the larger-cost alternative.
Otherwise, select the lower-cost alternative.
Note that the decision is based upon incrementally justified total costs, not incre-
mentally justified initial cost.
There are several special considerations for B/C analysis of multiple alternatives
that make it slightly different from ROR analysis. As mentioned earlier, all costs have
a positive sign in the B/C ratio. Also, the ordering of alternatives is done on the basis
bLa01293_ch07.qxd 8/13/09 4:01 PM Page 169

7.3 Incremental B/C Evaluation of Two or More Alternatives 169

of total costs in the denominator of the ratio. Thus, if two alternatives have equal
initial investments and lives, but 2 has a larger equivalent annual cost, then 2 must
be incrementally justified against 1. If this convention is not correctly followed, it is
possible to get a negative cost value in the denominator, which can incorrectly make
⌬B/C ⬍ 1 and reject a higher-cost alternative that is actually justified. In the unusual
circumstance that the two alternatives have equal costs (yielding a ⌬B/C of infinity),
the alternative with the larger benefits is selected by inspection.
Like the ROR method, B/C analysis requires equal-service comparison of
alternatives. Usually, the expected useful life of a public project is long (25 or 30
or more years), so alternatives generally have equal lives. However, when alterna-
tives do have unequal lives, the use of PW to determine the equivalent costs and
benefits requires that the LCM of lives be used.
There are two types of benefits. Before conducting the incremental evaluation,
classify the alternatives as usage cost estimates or direct benefit estimates. Usage cost
estimates have implied benefits based on the difference in costs between alternatives.
Direct benefit alternatives have benefit amounts estimated. The incremental compar-
ison differs slightly for each type; direct benefit alternatives are initially compared
with the DN alternative. (This is the same treatment made for revenue alternatives
in an ROR evaluation, but the term revenue is not used for public projects.)
Usage cost: Evaluate alternatives only against each other.
Direct benefit: First evaluate against do-nothing, then against each other.
Apply the following procedure for comparing multiple, mutually exclusive
alternatives using the conventional B/C ratio:
1. For each alternative, determine the equivalent PW, AW, or FW values for costs
C and benefits B [or (B ⫺ D) if disbenefits are considered].
2. Order the alternatives by increasing total equivalent cost. For direct benefit
alternatives, add DN as the first alternative.
3. Determine the incremental costs and benefits between the first two ordered
alternatives (that is, 2 ⫺ 1) over their least common multiple of lives. For
usage cost alternatives, incremental benefits are determined as the difference
in usage costs.
¢B ⫽ usage cost of 2 ⫺ usage cost of 1 [7.4]
4. Calculate the incremental conventional B/C ratio using Equation [7.2]. If dis-
benefits are considered, this is
¢B/C ⫽ ¢(B ⫺ D)/¢C [7.5]
5. If ⌬B/C ⱖ 1, eliminate 1; 2 is the survivor; otherwise 1 is the survivor.
6. Continue to compare alternatives using steps 2 through 5 until only one alter-
native remains as the survivor.
In step 3, prior to calculating the ⌬B/C ratio, visually check the PW, AW, or FW
values to ensure that the larger cost alternative also yields larger benefits. If ben-
efits are not larger, the comparison is unnecessary.
The next two examples illustrate this procedure; the first for two direct bene-
fit estimate alternatives, and the second for four usage fee estimate alternatives.
bLa01293_ch07_160-181 9/6/07 11:41 PM Page 170

170 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

EXAMPLE 7.3 The city of Garden Ridge, Florida has received two designs for a new wing to
the municipal hospital. The costs and benefits are the same in most categories,
but the city financial manager decided that the following estimates should be
considered to determine which design to recommend at the city council meet-
ing next week.

Design 1 Design 2

Construction cost, $ 10,000,000 15,000,000

Building maintenance cost, $/year 35,000 55,000
Patient benefits, $/year 800,000 1,050,000

The patient benefit is an estimate of the amount paid by an insurance carrier,

not the patient, to occupy a hospital room with the features included in the
design of each room. The discount rate is 5% per year, and the life of the addi-
tion is estimated at 30 years.
a. Use conventional B/C ratio analysis to select design 1 or 2.
b. Once the two designs were publicized, the privately owned hospital in the
adjacent city of Forest Glen lodged a complaint that design 1 will reduce its
own municipal hospital’s income by an estimated $600,000 per year because
some of the day-surgery features of design 1 duplicate its services. Subse-
quently, the Garden Ridge merchants’ association argued that design 2 could
reduce its annual revenue by an estimated $400,000 because it will eliminate
an entire parking lot used for short-term parking. The city financial manager
stated that these concerns would be entered into the evaluation. Redo the B/C
analysis to determine if the economic decision is still the same.
Solution
a. Apply the incremental B/C procedure with no disbenefits included and
direct benefits estimated.
1. Since most of the cash flows are already annualized, ⌬B/C is based on
AW values. The AW of costs is the sum of construction and mainte-
nance costs.
AW1 ⫽ 10,000,000(AⲐP,5%,30) ⫹ 35,000 ⫽ $685,500
AW2 ⫽ 15,000,000(AⲐP,5%,30) ⫹ 55,000 ⫽ $1,030,750
2. Since the alternatives have direct benefits estimated, the DN option is
added as the first alternative with AW of costs and benefits of $0. The
comparison order is DN, 1, 2.
3. The comparison 1–to–DN has incremental costs and benefits exactly
equal to those of alternative 1.
4. Calculate the incremental B/C ratio.
¢B/C ⫽ 800,000Ⲑ685,500 ⫽ 1.17
5. Since 1.17 ⬎ 1.0, design 1 is the survivor over DN.
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 171

7.3 Incremental B/C Evaluation of Two or More Alternatives 171

The comparison continues for 2-to-1 using incremental AW values.

¢B  1,050,000  800,000  $250,000
¢C  1,030,750  685,500  $345,250
¢B/C  250,000 345,250  0.72
Since 0.72  1.0, design 2 is eliminated, and design 1 is the selection for
the construction bid.
b. The revenue loss estimates are considered disbenefits. Since the disben-
efits of design 2 are $200,000 less than those of 1, this positive differ-
ence is added to the $250,000 benefits of 2 to give it a total benefit of
$450,000.
$450,000
¢B/C   1.30
$345,250
Design 2 is now favored. The inclusion of disbenefits reversed the decision.

The Economic Development Corporation (EDC) for the city of Bahia, California EXAMPLE 7.4
and Moderna County is operated as a not-for-profit corporation. It is seeking a
developer that will place a major water park in the city or county area. Finan-
cial incentives will be awarded. In response to a request for proposal (RFP) to
the major water park developers in the country, four proposals have been
received. Larger and more intricate water rides and increased size of the park
will attract more customers, thus different levels of initial incentives are
requested in the proposals.
Approved and in-place economic incentive guidelines allow entertainment
industry prospects to receive up to $1 million cash as a first-year incentive award
and 10% of this amount each year for 8 years in property tax reduction. Each
proposal includes a provision that residents of the city or county will benefit
from reduced entrance (usage) fees when using the park. This fee reduction will
be in effect as long as the property tax reduction incentive continues. The EDC
has estimated the annual total entrance fees with the reduction included for local
residents. Also, EDC estimated the benefits of extra sales tax revenue. These
estimates and the costs for the initial incentive and annual 10% tax reduction
are summarized in the top section of Table 7.1.
Perform an incremental B/C study to determine which park proposal is the
best economically. The discount rate is 7% per year.
Solution
The viewpoint taken for the economic analysis is that of a resident of the city
or county. The first-year cash incentives and annual tax reduction incentives
are real costs to the residents. Benefits are derived from two components: the
decreased entrance fee estimates and the increased sales tax receipts. These will
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 172

172 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

TABLE 7.1 Estimates of Costs and Benefits, and the Incremental B/C Analysis for Four
Water Park Proposals, Example 7.4

Proposal 1 Proposal 2 Proposal 3 Proposal 4

Initial incentive, $ 250,000 350,000 500,000 800,000

Tax incentive cost, $/year 25,000 35,000 50,000 80,000
Resident entrance fees, $/year 500,000 450,000 425,000 250,000
Extra sales taxes, $/year 310,000 320,000 320,000 340,000
Study period, years 8 8 8 8
AW of total costs, $/year 66,867 93,614 133,735 213,976
Alternatives compared 2-to-1 3-to-2 4-to-2

Incremental costs C, $/year 26,747 40,120 120,360

Entrance fee reduction, $/year 50,000 25,000 200,000
Extra sales tax, $/year 10,000 0 20,000
Incremental benefits B, $/year 60,000 25,000 220,000
Incremental B/C ratio 2.24 0.62 1.83
Increment justified? Yes No Yes
Alternative selected 2 2 4

benefit each citizen indirectly through the increase in money available to those
who use the park and through the city and county budgets where sales tax
receipts are deposited. Since these benefits must be calculated indirectly from
these two components, the alternatives are classified as usage cost estimates.
Table 7.1 includes the results of applying an AW-based incremental B/C
procedure.
1. For each alternative, the capital recovery amount over 8 years is determined
and added to the annual property tax incentive cost. For proposal #1,
AW of total costs  initial incentive (A P,7%,8)  tax cost
 $250,000 (A P,7%,8)  25,000  $66,867
2. The usage-cost alternatives are ordered by the AW of total costs in Table 7.1.
3. Table 7.1 shows incremental costs. For the 2-to-1 comparison,
¢C  $93,614  66,867  $26,747
Incremental benefits for an alternative are the sum of the resident entrance
fees compared to those of the next-lower-cost alternative, plus the increase
in sales tax receipts over those of the next-lower-cost alternative. Thus, the
benefits are determined incrementally for each pair of alternatives. For the
2-to-1 comparison, resident entrance fees decrease by $50,000 per year
and the sales tax receipts increase by $10,000. The total benefit is the sum,
B  $60,000 per year.
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 173

7.3 Incremental B/C Evaluation of Two or More Alternatives 173

4. For the 2-to-1 comparison, Equation [7.5] results in

¢B/C  $60,000 $26,747  2.24
5. Alternative #2 is clearly justified. Alternative #1 is eliminated.
6. This process is repeated for the 3-to-2 comparison, which has B/C  1.0
because the incremental benefits are substantially less than the increase in
costs. Proposal #3 is eliminated, and the 4-to-2 comparison results in
¢B  200,000  20,000  $220,000
¢C  213,976  93,614  $120,362
¢B/C  $220,000 $120,362  1.83
Since B/C  1.0, proposal #4 survives as the one remaining alternative.

When the lives of alternatives are so long that they can be considered infi-
nite, the capitalized cost is used to calculate the equivalent PW or AW values.
Equation [5.6], A  P(i), determines the equivalent AW values in the incremen-
tal B/C analysis.
If two or more independent projects are evaluated using B/C analysis and there
is no budget limitation, no incremental comparison is necessary. The only compar-
ison is between each project separately with the do-nothing alternative. The proj-
ect B/C values are calculated, and those with B/C  1.0 are accepted.

The Army Corps of Engineers wants to construct a dam on a flood-prone river. EXAMPLE 7.5
The estimated construction cost and average annual dollar benefits are listed
below. A 6% per year rate applies and dam life is infinite for analysis purposes.
(a) Select the one best location using the B/C method. (b) If the sites are now
considered independent projects, which sites are acceptable?

Construction Cost, Annual

Site $ millions Benefits, $

A 6 350,000
B 8 420,000
C 3 125,000
D 10 400,000
E 5 350,000
F 11 700,000

Solution
a. The capitalized cost A  Pi is used to obtain AW values of the construction
cost, as shown in the first row of Table 7.2. Since benefits are estimated
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 174

174 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

TABLE 7.2 Use of Incremental B/C Ratio Analysis for Example 7.5 (Values in $1000)
DN C E A B D F

AW of cost, $/year 0 180 300 360 480 600 660

Annual benefits, $/year 0 125 350 350 420 400 700
Site B/C — 0.69 1.17 0.97 0.88 0.67 1.06
Comparison C-to-DN E-to-DN A-to-E B-to-E D-to-E F-to-E

 Annual cost, $/year 180 300 60 180 300 360

 Annual benefits, $/year 125 350 0 70 50 350
 B/C ratio 0.69 1.17 — 0.39 0.17 0.97
Increment justified? No Yes No No No No
Site selected DN E E E E E

directly, initial comparison with DN is necessary. For the analysis, sites are
ordered by increasing AW-of-cost values. This is DN, C, E, A, B, D, and
F. The analysis between the ordered mutually exclusive alternatives is
detailed in the lower portion of Table 7.2. Since only site E is incremen-
tally justified, it is selected.
b. The dam site proposals are now independent projects. The site B/C ratio is
used to select from none to all six sites. In Table 7.2, third row, B/C  1.0
for sites E and F only; they are acceptable.

7.4 USING SPREADSHEETS FOR B/C ANALYSIS

Formatting a spreadsheet to apply the incremental B/C procedure for mutually
exclusive alternatives is basically the same as that for an incremental ROR analy-
sis (Section 6.8). Once all estimates are expressed in terms of either PW, AW, or
FW equivalents using Excel functions, the alternatives are ordered by increasing
total equivalent cost. Then, the incremental B/C ratios from Equation [7.5] assist
in selecting the one best alternative.

EXAMPLE 7.6 A significant new application of nanotechnology is the use of thin-film solar
panels applied to houses to reduce the dependency on fossil-fuel generated elec-
trical energy. A community of 400 new all-electric public housing units will
utilize the technology as anticipated proof that significant reductions in overall
utility costs can be attained over the expected 15-year life of the housing.
Table 7.3 details the three bids received. Also included are estimated annual
electricity usage costs for the community with the panels in use, and the PW
bLa01293_ch07_160-181 8/26/07 2:28 AM Page 175

7.4 Using Spreadsheets for B/C Analysis 175

TABLE 7.3 Estimates for Alternatives Using Nanocrystal-Layered

Thin-Film Solar Panel Technology for Energy,
Example 7.6

Bidder Geyser, Inc. Harris Corp. Crumbley, LLP

Bid identification G H C
PW of initial cost, $ 2,400,000 1,850,000 6,150,000
Annual maintenance, $/year 500,000 650,000 450,000
Annual utility bill, $/year 960,000 1,000,000 550,000
PW of backup systems, $ 650,000 750,000 950,000

of backup systems required in case of panel failures. Use a spreadsheet, the con-
ventional B/C ratio, and i ⫽ 5% per year to select the best bid.
Solution
Benefits will be estimated from utility bill differences, so the alternatives are
classified as usage cost. Initial comparison to DN is unnecessary. The step-by-
step procedure (Section 7.3) is included in the Figure 7.1 solution.
1. Base the analysis on present worth. With the use of PV functions to deter-
mine PW of construction costs and utility bills (rows 9 and 10), all bene-
fit, disbenefit, and cost terms are prepared. (Note the inclusion of the minus
sign on the PV function to ensure that cost terms have a positive sense.)

FIGURE 7.1 Spreadsheet evaluation of multiple alternatives using incremental B/C analysis, Example 7.6.
bLa01293_ch07_160-181 9/6/07 10:00 PM Page 176

176 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

2. Based on PW of costs (row 9), the order of evaluation is G, H, and finally

C. It is important to realize that even though H has a smaller initial cost,
G has a smaller equivalent total cost.
3. The first comparison is H-to-G. The form of Equation [7.4] helps determine
B with the minus sign on utility bill costs changed to a plus for the B/C
computation.
B  utility bills for H  utility bills for G  (10,379,658 
9,964,472)  $415,186
In this case B  0 due to the larger PW of utility bills for H. There is no
need to complete the comparison, since (B  D)/C will be negative.
4. The value (B  D)/C  0.51 is determined for illustration only.
5. G is the survivor; now compare C-to-G.
The comparison in column E results in (B  D)/C  1.22, indicating that the
Crumbley bid is incrementally justified and is the selected bid. This is the most
expensive bid, especially in initial cost, but the savings in utility bills help make
it the most economic over the 15-year planning horizon.

SUMMARY
The benefit/cost method is used primarily to evaluate sector projects, the initial costs are usually large,
alternatives in the public sector. When one is com- the expected life is long (25, 35, or more years),
paring mutually exclusive alternatives, the incremen- and the sources for capital are usually a combina-
tal B/C ratio must be greater than or equal to 1.0 for tion of taxes levied on the citizenry, user fees, bond
the incremental equivalent total cost to be economi- issues, and private lenders. It is very difficult to
cally justified. The PW, AW, or FW of the initial make accurate estimates of benefits and disbenefits
costs and estimated benefits can be used to perform for a public sector project. The discount rates in
an incremental B/C analysis. the public sector are lower than those for corporate
Public sector economics are substantially dif- projects.
ferent from those of the private sector. For public

PROBLEMS
B/C Considerations security, EMS, ATM, travel agency, amusement
park, gambling casino, and swap meet.
7.1 What is the primary purpose of public sector 7.3 State whether the following characteristics are
projects? primarily associated with public or private sector
7.2 Identify the following as primarily public or pri- projects: Large initial investment, short life projects,
vate sector undertakings: eBay, farmer’s market, profit, disbenefits, tax-free bonds, subsidized loans,
state police department, car racing facility, social
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 177

Problems 177

low interest rate, income tax, and water quality daily flow rates are relatively low. If the operating
regulations. cost is $600,000 per year, what would the initial
7.4 What is the difference between disbenefits and investment cost of the GFH system have to be in
costs? order to get a B/C ratio of 1.0? Public health ben-
7.5 Identify the following cash flows as a benefit, dis- efits are estimated at $800,000 per year. Assume
benefit, or cost. the equipment life is 10 years and the interest rate
a. $400,000 annual income to local businesses is 6% per year.
because of tourism created by a national park. 7.13 The cash flows associated with a Bexar County
b. Cost of fish from a hatchery to stock the lake at Arroyo improvement project are as follows: initial
a state park. cost $650,000; life 20 years; maintenance cost
c. Less tire wear because of smoother road $150,000 per year; benefits $600,000 per year;
surfaces. disbenefits $190,000 per year. Determine the con-
d. Decrease in property values due to closure of a ventional B/C ratio at an interest rate of 6% per
government research lab. year.
e. School overcrowding because of military base 7.14 The Parks and Recreation Department of Burkett
expansion. County estimates that the initial cost of a “bare-
f. Revenue to local motels because of an ex- bones” permanent river park will be $2.3 million.
tended national park season. Annual upkeep costs are estimated at $120,000.
7.6 What is meant by a BOT project? Benefits of $340,000 per year and disbenefits of
7.7 In taking the broadest viewpoint for benefits and $40,000 per year have also been identified. Using
disbenefits, state why they might exactly offset a discount rate of 6% per year, calculate (a) the
each other. conventional B/C ratio and (b) the modified B/C
7.8 Where is the salvage value placed in a conven- ratio.
tional B/C ratio? Why? 7.15 From the following data, calculate the (a) conven-
tional and (b) modified benefit/cost ratios using an
Single Project B/C interest rate of 6% per year and a study period of
7.9 What is the difference between a conventional and 40 years.
a modified B/C analysis?
7.10 A public water utility spent $12 million to build a
treatment plant to remove certain heavy metals To the People To the Government
from well water. The plant’s operating cost is Benefits: $200,000 now Costs: $1.2 million now
$1.1 million per year. Public health benefits are and $100,000 and $200,000 three
expected to be $285,000 per year. What is the B/C per year for years from now
ratio, if the plant is amortized over a 40-year pe- forty years Savings: $90,000 five
riod at 6% per year interest? Disbenefits: $18,000 per years from now
7.11 Calculate the conventional B/C ratio for the cash year
flow estimates shown at a discount rate of 8% per
year.
7.16 From the following data, calculate the (a) conven-
tional and (b) modified benefit/cost ratios using an
Item Cash Flow
interest rate of 6% per year and an infinite project
PW of benefits, $ 3,800,000 period.
AW of disbenefits, $ per year 65,000
First cost, $ 1,200,000
M&O costs, $ per year 300,000 To the People To the Government
Life of project, years 20 Benefits: $300,000 now Costs: $1.5 million now
and $100,000 and $200,000 three
per year years from now.
7.12 On-site granular ferric hydroxide (GFH) systems Disbenefits: $40,000 per year Savings: $70,000 per year
can be used to remove arsenic from water when
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 178

178 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

7.17 When red light cameras are installed at high-risk supplies (gases, chemicals, glassware, etc.) will
intersections, rear-end collisions go up, but all cost $19,000 per year. The utility anticipates 140
other types of accidents go down, including those samples per year. If the analyses are sent to an out-
involving pedestrians. Analysis of traffic accidents side lab, the cost per sample will average $1250. If
in a northwestern city revealed that the total num- the utility uses an interest rate of 6% per year, cal-
ber of collisions at photo-enhanced intersections culate the B/C ratio associated with purchasing the
decreased from 33 per month to 18. At the same equipment.
time, the number of traffic tickets issued for red
light violations averaged 1100 per month, at a cost Alternative Comparison
to violators of $85 per citation. The cost to install 7.21 Two relatively inexpensive alternatives are avail-
the basic camera system at selected intersections able to reduce potential earthquake damage at a
was $750,000. If the cost of a collision is esti- top secret government research site. The cash flow
mated at $41,000 and traffic ticket costs are con- estimates for each alternative are shown. At an in-
sidered as disbenefits, calculate the B/C ratio for terest rate of 8% per year, use the B/C ratio
the camera system. Use an interest rate of 0.5% method to select one. Use a 20-year study period,
per month and a 3-year study period. and assume the damage costs would occur in the
7.18 The solid waste department of a certain southwest- middle of the period, that is, in year 10.
ern city has embarked on a program to recycle
solid waste materials that previously ended up in a
Alternative 1 Alternative 2
landfill. The program involves distributing blue
plastic containers that cost $45 each to 172,000 Initial cost, $ 600,000 1,100,000
households. The city gets 10% of the revenue from Annual maintenance,
the sale of recyclables, and the company that man- $ per year 50,000 70,000
ages the recovery operation receives 90%. The Potential damage costs, $ 950,000 250,000
smaller volume of disposable solid waste materi-
als will extend the life of the landfill, resulting in 7.22 The two alternatives shown below are under con-
equivalent savings of $80,000 per year. If the con- sideration for improving security at a county jail.
tainers are amortized over a 10-year period at 6% Select one based on a B/C analysis at an interest
per year, calculate the B/C ratio. The city’s share rate of 7% per year and a 10-year study period.
of the revenue is $194,000 per year.
7.19 The B/C ratio for a mosquito control program pro-
Extra New
posed by the Harris County Department of Health Cameras (EC) Sensors (NS)
is reported as 2.3. The person who prepared the re-
First cost, $ 38,000 87,000
port stated that the health benefits were estimated
at $500,000, and that disbenefits of $45,000 per Annual M&O, $ per year 49,000 64,000
year were used in the calculation. He also stated Benefits, $ per year 110,000 160,000
that the costs for chemicals, machinery, mainte- Disbenefits, $ per year 26,000 —
nance, and labor were estimated at $150,000 per
year, but he forgot to list the cost for initiating the 7.23 Two methods are being evaluated for constructing a
program (trucks, pumps, tanks, etc.). If the initial second-story floor onto an existing building at the
cost was amortized over a 10-year period at 7% per Pentagon. Method A will use lightweight expanded
year, what is the estimated initial cost? shale on a metal deck with open web joists and steel
7.20 A water utility is trying to decide between in- beams. For this method, the costs will be $14,100
stalling equipment for conducting analyses for en- for concrete, $6000 for metal decking, $4300 for
docrine disrupting substances, pharmaceuticals, joists, and $2600 for beams. Method B will be a re-
and personal-care products or sending the samples inforced concrete slab that will cost $5200 for con-
to a private contract lab. The equipment to conduct crete, $1400 for rebar, $2600 for equipment rental,
the tests will cost $595,000 and will have a 5-year and $1200 for expendable supplies. Special addi-
life. In addition, a full-time chemist will have to be tives will be included in the lightweight concrete
hired at a cost of $56,000 per year. Expendable that will improve the heat transfer properties of the
bLa01293_ch07_160-181 8/25/07 10:44 AM Page 179

Problems 179

floor. If the energy costs for method A will be $600 7.27 Engineers working in the Transportation Planning
per year lower than for method B, which one is Department for the State of West Virginia have
more attractive at an interest rate of 7% per year identified three viable sites for a new bridge across
over a 20-year study period? Use the B/C method. the Ohio River. All three sites are within 15 miles
7.24 A public utility in a medium-sized city is consider- of each other, but the land and construction costs
ing two cash rebate programs to achieve water con- vary. The bridge that would directly link the cities
servation. Program 1, which is expected to cost an on opposite sides of the river would have the low-
average of $60 per household, would involve a re- est travel costs (shortest distance), but it would
bate of 75% of the purchase and installation costs of also have the highest construction cost because of
an ultra low-flush toilet ($100 maximum). This property values. The bridge location just north of
program is projected to achieve a 5% reduction in the two cities would involve less travel time than
overall household water use over a 5-year evaluation the one to the south. The costs associated with
period. This will benefit the citizenry to the extent of each bridge are shown. At an interest rate of 6%
$1.25 per household per month. Program 2 would per year, determine which location is preferred,
involve turf replacement with desert landscaping. assuming the bridges will be permanent.
This is expected to cost $500 per household, but it
will result in reduced water cost estimated at $8 per
household per month (on the average). At a discount Location
rate of 0.5% per month, which programs should the S D N
utility undertake if the programs are (a) mutually ex-
Construction cost, $ 50,000,000 75,000,000 60,000,000
clusive, and (b) independent? Use the B/C method.
7.25 Solar and conventional alternatives are available Maintenance cost,
$ per year 150,000 130,000 140,000
for providing energy at a remote U.S. Army train-
ing site. The costs associated with each alternative User travel costs,
$ per year 7,600,000 4,100,000 5,900,000
are shown. Use the B/C method to determine
which should be selected at an interest rate of 7%
per year over a 5-year study period. 7.28 A consulting engineer is currently evaluating 4
different projects for the U. S. government. The
Conventional Solar present worths of the costs, benefits, disbenefits,
Initial cost, $ 200,000 1,300,000 and cost savings are shown. Assuming the interest
Annual power cost, $ per year 80,000 9,000 rate is 10% per year compounded continuously,
Salvage value, $ 10,000 150,000 determine which of the projects, if any, should be
selected if the projects are (a) independent, and
(b) mutually exclusive.
7.26 Four methods are available to recover lubricant
from an automated milling system. The invest-
ment costs and income associated with each are Best
shown. Assuming that all methods have a 10-year Good Better Best of All
life with zero salvage value, determine which one PW of costs, $ 10,000 8,000 20,000 14,000
should be selected using a MARR of 10% per year
PW of benefits, $ 15,000 11,000 25,000 42,000
and the B/C method. Consider operating cost as a
PW of disbenefits, $ 6,000 1,000 20,000 31,000
disbenefit.
PW of cost savings, $ 1,500 2,000 16,000 3,000
Method
1 2 3 4 7.29 From the AW data shown for projects regarding
First cost, $ 15,000 19,000 25,000 33,000 solid waste handling at a military training facility,
Annual operating cost,
determine which project, if any, should be selected
$/year 10,000 12,000 9,000 11,000 from the 6 mutually exclusive projects. If the
Annual income, $/year 16,000 20,000 19,000 22,000
proper B/C comparisons have not been made,
state which ones should be done.
bLa01293_ch07_160-181 9/6/07 10:01 PM Page 180

180 Chapter 7 Benefit/Cost Analysis and Public Sector Projects

Selected incremental B/C ratios:

Project Identification
A B C D E F G vs. H ⫽ 0.68
AW of G vs. I ⫽ 0.73
cost, $ 20,000 60,000 36,000 48,000 32,000 26,000 H vs. J ⫽ 0.10
Life, years 20 20 20 20 20 20 J vs. I ⫽ 1.07
AW of G vs. J ⫽ 1.07
benefits, $ ? ? ? ? ? ? H vs. K ⫽ 1.00
B/C Ratio 0.8 1.17 1.44 1.38 1.13 1.08 H vs. L ⫽ 1.36
J vs. K ⫽ 0.82
Selected incremental B/C ratios: J vs. L ⫽ 1.00
A vs. E ⫽ 2.0 K vs. L ⫽ 0.40
B vs. C ⫽ 0.75 G vs. L ⫽ 1.02
B vs. D ⫽ 0.33 7.31 The 4 mutually exclusive alternatives shown are
E vs. D ⫽ 1.88 being compared by the B/C method. Which alter-
F vs. E ⫽ 1.33 native, if any, should be selected?
E vs. C ⫽ 4.00
A vs. E ⫽ 1.67 Incremental B/C
A vs. B ⫽ 1.35 Alternative when Compared
C vs. F ⫽ 2.40 Alter- Cost, Direct with Alternative
C vs. D ⫽ 1.17 native $ Millions B/C Ratio X Y Z ZZ
B vs. F ⫽ 1.24 X 20 0.75 —
Y 30 1.07 1.70 —
7.30 From the AW data shown below for projects re-
garding campgrounds and lodging at a national Z 50 1.20 1.50 1.40 —
park, determine which project, if any, should be ZZ 90 1.11 1.21 1.13 1.00 —
selected from the 6 mutually exclusive projects. If
the proper comparisons have not been made, state
which one(s) should be done.

Project Identification
G H I J K L
Cost, $ 20,000 45,000 50,000 35,000 85,000 70,000
B/C Ratio 1.15 0.89 1.10 1.11 0.94 1.06

PROBLEMS FOR TEST REVIEW AND FE EXAM PRACTICE

7.32 All of the following are examples of public sector 7.34 The conventional B/C ratio is written as
projects except a. B/C ⫽ (Benefits ⫺ Disbenefits)/⫺ Costs
a. bridges. b. B/C ⫽ (Benefits ⫺ Disbenefits)/Costs
b. emergency relief. c. B/C ⫽ (Benefits ⫹ Disbenefits)/Costs
c. prisons. d. B/C ⫽ Benefits/(Costs ⫹ Disbenefits)
d. oil wells. 7.35 From the values shown, the conventional B/C ratio
7.33 All of the following are usually associated with is closest to
public sector projects except a. 1.28.
a. funding from taxes. b. 1.33.
b. profit. c. 1.54.
c. disbenefits. d. 2.76.
d. infinite life.
bLa01293_ch07_160-181 8/26/07 2:43 AM Page 181

Problems for Test Review and FE Exam Practice 181

7.38 The conventional B/C ratio between alternatives

PW, $ AW, $/year FW, $
Ice and T is closest to
First cost $100,000 $16,275 $259,370 a. 0.24.
M&O cost $61,446 $10,000 $159,374 b. 0.33.
Benefits $245,784 $40,000 $637,496 c. 0.53.
Disbenefits $30,723 $5,000 $79,687 d. 0.73.
7.39 The following 4 independent alternatives are be-
ing compared using the B/C method. The alterna-
7.36 The four mutually exclusive alternatives shown are
tive(s), if any, to select are
compared using the B/C method. The alternative,
if any, to select is
a. J. Incremental B/C
b. K. when Compared
c. L. Alter- Cost, B/C Ratio with Alternative
d. M. native $ millions vs. DN J K L M
J 20 1.1 —
Incremental B/C K 25 0.96 0.40 —
when Compared L 33 1.22 1.42 2.14 —
Alter- Cost, B/C Ratio with Alternative M 45 0.89 0.72 0.80 0.08
native $ millions vs. DN J K L M
a. J.
J 20 1.1 —
b. J and K.
K 25 0.96 0.40 —
c. L.
L 33 1.22 1.42 2.14 — d. J and L.
M 45 0.89 0.72 0.80 0.08 — 7.40 For the data shown, the conventional benefit-to-
cost ratio at i ⫽ 10% per year is closest to
Problems 7.37 and 7.38 are based on the following Benefits of $20,000 in year 0 and $30,000 in
information year 5
The Corps of Engineers compiled the following data to de- Disbenefits of $7000 at year 3
termine which of two flood control dams it should build in Savings (government) of $25,000 in years 1
a certain residential area. through 4
Cost of $100,000 in year 0
Project life is 5 years
Ice T
Flood damage, $/year 220,000 140,000 a. less than 1.5.
Disbenefits, $/year 30,000 30,000 b. 1.61.
Costs, $/year 300,000 450,000 c. 1.86.
d. 1.98.
7.41 If benefits are $10,000 per year forever, starting in
7.37 In conducting a B/C analysis of this data, year 1, and costs are $50,000 at time zero and
a. the DN alternative is not an option. $50,000 at the end of year 2, the B/C ratio at
b. the DN alternative is an option. i ⫽ 10% per year is closest to
c. there is not enough information given to know a. 1.1.
if DN is an option or not. b. 1.8.
d. DN is an option only if the alternatives Ice and c. 0.90.
T are mutually exclusive. d. less than 0.75.