University of Southeastern

Mindanao
C o l l e g e o f E n g i n e e r i n g a n d I n f o rm a t i o n Te c h n o l o g y
B a c h e l o r o f S c i e n c e i n E l e c t ro n i c s E n g i n e e r i n g

PERSPECTIVE AND
T E R M I N O LO GY O F P U B L I C

B E N E F I T- C O S T
PROJECT

RAT I O M E T H O D
Pre s e n t e d b y: G ro u p 1
October 29, 2024
 Evaluating Projects with
the Benefi t-Cost Ratio
Method
Objectives:
• Understanding how the Benefit-Cost (B-C) ratio
helps evaluate public projects.
• To demonstrate the use of the benefit–cost (B–C)
ratio for the evaluation of public projects.

Learning Outcomes:
• Analyze differences between public and private
projects
• Define and apply the B-C ratio
• Navigate challenges in evaluating public projects
Introductio
n
Public projects, managed by
government agencies, are
often large-scale and require
careful fi nancial planning.
While they follow engineering
economy principles, they
diff er from private businesses
due to special factors.
Public vs. Private Projects
Diff erences Between Public and Private
Projects
Public are funded by government sources and emphasize public
Projects
welfare without focusing on profi t. They often have longer
lifespans, broader benefi ciaries, and are infl uenced by
political and legal factors.
Private are profi t-driven, fi nanced by investors, and
Projects
have shorter timelines. Private projects
primarily benefi t owners or shareholders
directly.
Key Financing methods, project life, nature
Diff erence
s of benefi ts, and the level of political
infl uence, which is often higher in public
projects.
Public projects are unique in many
ways
1. Frequently much larger than private
projects
2. They may have multiple, varied purposes
that sometimes conflict
3. Often a very long project lives
4. Capital source is at first tax payers (tax
revenue of the government)
5. Decisions made are often politically
influenced
6. Benefits are often non-monetary and are
difficult to measure.
Benefi ts-Costs (B-C)
Analysis
B-C analysis is a systematic
approach to assess public
projects by comparing benefi ts
with costs. It’s designed to
ensure that projects provide
suffi cient long-term public
benefi ts to justify taxpayer
investment.
Purpose:
Evaluate public projects based on their benefi ts
relative to costs.
Long-term Focus: B-C analysis considers both
immediate and future benefi ts.
Example:
Project: Building a bypass to ease traffic
congestion:
Cost: $20 million for construction,
$500,000 annual maintenance.
Benefits: Reduced congestion, improved
safety,
commercial growth valued at $2 million
 Perspective and Terminology for
Public Project Analysis

Perspective: Since public projects are taxpayer-funded, benefits must focus

on public welfare. B-C analysis considers who truly benefits from the
project.
In conducting an engineering economic analysis of any project, whether it is a
public or a private undertaking, the proper perspective is to consider the net
Returns
benefits to the owners of
the enterprise considering the project. This process requires that the question
of who owns the project be addressed.
Perspective and Terminology for Public
Project Analysis
TERMINOLOGIE
S:
Benefit Costs Disbenefit
Project costs
Projectsbenefits Thesterm
represent the disbenefits is
are defined as
monetary generally used to
the favorable
disbursement(s represent the
consequences Returns negative
) required of
of the project consequences of
the
to the public. a project to the
government.
public.
Perspective and Terminology for
Public Project Analysis
Perspective and Terminology for Public
Project Analysis
Self-Liquidating
Projects
Self-liquidating projects are
government-funded initiatives
expected to generate revenue,
covering their own costs. Unlike
profi t-driven private ventures,
these projects provide services that
repay the investment over time.

Examples: Toll roads, bridges,

and hydroelectric dams that
charge users for access, thus
generating revenue to cover
expenses.
 Multiple-Purpose
Projects
An important characteristic of public-
sector projects is that many such
projects have
multiple purposes or objectives.
 This project would have multiple purposes:
(1) assist in flood control, (2) provide water for irrigation, (3) generate
electric power, (4) provide recreational facilities, and
(5) provide drinking water.
 Challenges
A multipurpose dam project faces three main
issues:
1. Cost Allocation: Distributing the $35 million cost among the
dam's purposes (flood control, irrigation, power generation,
drinking water, and recreation) is challenging, as some costs
overlap and aren't easily assigned.
2. Conflicting Interests: Different purposes require different
water levels, leading to compromises. For example, flood control
needs a low water level, while power generation and recreation
benefit from higher, stable levels.
3. Political Sensitivity: Public interest and opposition can turn
such projects into political issues, impacting cost distribution and
project feasibility.
The net result of these three factors is that the cost
allocations made in multiple-purpose public-sector
projects tend to be arbitrary. As a consequence,
production and selling costs of the services provided
also are arbitrary. Because of this, these costs cannot
be used as valid yardsticks with which similar
private-sector projects can be compared to
determine the relative efficiencies of public and
private ownership.
CHALLENGES IN
PUBLIC PROJECT
EVALUATION
Diffi culties in Evaluating Public-
Sector Projects

Evaluating public-sector projects is complex due to broad

costs and benefits impacting various segments of the
public, unlike private projects where only internal costs
and benefits matter. Public projects require assessing all
potential benefits,
Returnswhich is challenging. Yet, given the

significant capital and long-term effects, a systematic

evaluation approach is essential for informed decision-
making by officials or through public referendums.
Key issues:
1. No Profit Measure: Most are nonprofit,
lacking a profit standard.
2. Benefit Quantification: Many benefits are
hard to monetize.
3. Public Ownership: Often a disconnect exists
between the project and the public.
4. Political Influence: Decisions may favor
short-term gains over long-term impact.
5. Legal Restrictions: Public projects face
stricter operational limits.
6. Capital Access: Government bodies have
limited capital options.
7. Interest Rate Controversy: Choosing a rate
is politically sensitive, affecting long-term vs.
short-term prioritization.
What Interest Rate Should Be Used
for Public Projects?
In public-sector project evaluations,
interest rates refl ect the time value of
money but serve a diff erent purpose
than in the private sector. Rather than
maximizing profi t, the public sector
uses interest rates to allocate funds
eff ectively among projects to
maximize social benefi ts.
Three main
bear on what interest rate to use in engineering
considerations
economy studies of public-sector projects:

1. Borrowed Capital Cost: The interest

rate of funds specifically borrowed for
the project.

2. Opportunity Cost to the

Government: Benefits forgone from
other potential projects.

3. Opportunity Cost to Taxpayers:

Potential returns taxpayers miss from
private investments.
For public projects, interest rates
should ideally refl ect the cost of
capital:
1. Borrowed Capital Rate: Use the rate on bonds if money is borrowed
specifically for a project.
2. Agency Opportunity Cost: Agencies should select projects with
benefits that exceed those of alternatives, though this could lead to
varying rates across agencies funded by taxes.
3. Taxpayer Opportunity Cost: Using a rate that reflects potential
Returns
private investment returns is prudent, as advised by a 1997 OMB
directive recommending a 7% rate for federal projects.

Ultimately, setting the rate is a policy decision, except where specific

guidelines like the OMB directive apply.
 The Benefit−Cost Ratio
the B–C ratioMethod
method involves the
calculation of a ratio of benefi ts to
costs. Whether evaluating a project in
the private sector or in the public
sector, the time value of money must
be considered to account for the
timing of cash fl ows (or benefi ts)
occurring after the inception of the
project
Several different formulations of the B–
C ratio have been developed. Two of the
more commonly used formulations are
presented in this section, illustrating
the use of both present worth and
annual worth.
 Two
The B-C ratio Variants
compares the present 1. Conventional B-C Ratio: Uses total
or annual worth of project costs, including operating and
maintenance costs.
benefits to costs,
guiding decisions on 2. Modified B-C Ratio: Excludes
public projects. A ratio ongoing operating and maintenance
≥ 1.0 indicates that costs from the denominator
benefits justify costs.
 Key
Differences:
Conventional B-C Ratio: includes
O&M costs directly in the denominator
with the initial investment, emphasizing
total costs.
Modified B-C Ratio: subtracts O&M
costs from the benefits in the
numerator, focusing on net benefits.

Acceptance: If the B-C ratio is ≥ 1.0, the project is economically acceptable.

Exampl
e:
Conventional B-C:
Solutio
B-C=n:
PW(B)/[I – PW(MV) + PW(O&M))
B-C= $490,000 (P|A, 10%, 20)/[$1,200,000 + $197,500 (PlA, 10%, 20)]

Answer:
B-C=1.448
1.448 > 1; extend
runways
 Modified B-C:
Solutio
B-C=n:
[PW(B) – PW(O&M)I/[I – PW(MV]
B-C= [$490,000 (P/A, 10%, 20) – $197,500 (P/A, 10%, 20)]/$1,200,000

Answer:
B-C=2.075
2.075 > 1; extend
runways
Disbenefits in the B−C Ratio
Disbenefi ts refer to the negative
consequences of a public-sector project.
In a Benefi t-Cost (B–C) analysis, they can
be incorporated in two ways:
1. Subtracting from Benefi ts: Reduce the
total benefi ts by the amount of
disbenefi ts in the numerator of the B–C
ratio.
2. Adding to Costs: Include disbenefi ts as
additional costs in the denominator.
Disbenefits in the B−C Ratio
While the calculated B–C ratio
will diff er based on the
approach, project acceptability—
whether the ratio is greater
than, less than, or equal to 1.0—
remains unchanged.
Disbenefits in the B−C Ratio

B-C = _____________________________
benefi ts - disbenefi ts
costs
Exampl
e
A nonprofit educational research organization, is
contemplating an investment of P1,500,000 in grants to
develop new ways to teach people the rudiments of
profession. The grants would extend over a ten-year period
and would achieve an estimated savings of P500,000 per
year in professors' salaries, student tuition, and other
expenses. The program would be an addition to ongoing and
planned activities, thus an estimated Pl00,000 a year would
have to be released from other program to support the
educational research. a rate of return of 15% is expected. Is
this a good program?
 Solutio
n:P500,000 per year
Benefit
Disbenefit = P100,000 per year
Cost = P1,500,000 (A/P, 15%, 10) = P298,950 per year

B-C = P500,000- P100,000 / P298,950

Answer
The project is justified,
1.34
since BC > 1.00.
 Disbenefits reduce
Solutio benefits
B–C =n:
[AW(B) − AW(D)]/[CR + AW(O&M)]
B–C = [$490,000 − $100,000]/[$1,200,000 (A/P, 10%, 20) + $197,500]

Answer:
B–C = 1.152
1.152 > 1; extend
runways
Disbenefits treated as additional costs
Solutio
B–C =n:
AW(B)/[CR + AW(O&M) + AW(D)]
B–C = $490,000/[$1,200,000 (A/P, 10%, 20) + $197,500 + $100,000]

Answer:
B–C = 1.118
1.152 > 1; extend
runways
 References
ENGINEERING ECONOMY
Sixteenth Edition
By: WILLIAM G. SULLIVAN, ELIN M.
WICKS and C. PATRICK KOELLING
ENGINEERING ECONOMY
Third Edition
By: HIPOLITO B. STA. MARIA
Gerente General

Pre p a re d b y: B AG U I N DA , E S M A E L K .
Thank You!!!
Members
Baguinda, Esmael
K.
Rejas, Vlademire Andrie G.
Quilo, Shanel Joan P.

Yusop, Omaira G.

Gerente General