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Benefit/Cost Analysis and Public Sector Economics: Solutions To Problems
Benefit/Cost Analysis and Public Sector Economics: Solutions To Problems
(a) Public sector projects usually require large initial investments while many
private sector investments may be medium to small.
(b) Public sector projects usually have long lives (30-50 years) while private sector
projects are usually in the 2-25 year range.
(c) Public sector projects are usually funded from taxes, government bonds, or user
fees. Private sector projects are usually funded by stocks, corporate bonds, or
bank loans.
(d) Public sector projects use the term discount rate, not MARR. The discount rate
is usually in the 4 10% range, thus it is lower than most private sector MARR
values.
9.2
(a) Private
(f) Private
9.3
(a) Benefit
9.4
9.5
(a) Amount of financing for construction is too low, and usage rate is too low to
cover cost of operation and agreed-to profit.
(b) Special government-guaranteed loans and subsidies may be arranged at original
contract time in case these types of financial problems arise later.
9.6
Chapter 9
(b) Private
(b) Cost
(c) Public
(d) Public
(e) Public
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9.7 (a) Use Excel and assume an infinite life. Calculate the capitalized costs for all
annual amount estimates.
Chapter 9
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9.8
9.9
Chapter 9
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9.10 All parts are solved on the spreadsheet once it is formatted using cell references.
Note in part (b) how much larger ($150,000) than the median income ($30,000)
the required benefit becomes as fewer households are affected
9.11 (a) Cost = 4,000,000(0.04) + 300,000
= $460,000 per year
B/C = 550,000 90,000 = 1.0
460,000
(b) Cost = 4,000,000(0.04)
= $160,000 per year
B - C = (550,000 90,000) (160,000 + 300,000) = 0.0
The project is just economically acceptable using benefit/cost analysis.
Chapter 9
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9.12
9.13
(a) By-hand solution: First, set up AW value relation of the initial cost, P
capitalized a 7%. Then determine P for B/C = 1.3.
1.3 =
600,000____
P(0.07) + 300,000
Chapter 9
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9.14 Same spreadsheet, except change the discount rate and equations for AW and B/C.
The B/C value is the same at 1.3, so the project is still justified.
Chapter 9
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9.15
= 1.12
B/C =
1.12
B/C = (2,800,000)/(100,000+30,000,000*(0.08))
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9.19 Calculate the AW of initial cost, then the 3 B/C measures of worth. The roadway
should not be built.
Chapter 9
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9.20 (a)
AW = C = 1,500,000(A/P,6%,20) + 25,000
= 1,500,000(0.08718) + 25,000
= $155,770
Annual revenue = B = $175,000
B/C = 175,000/155,770 = 1.12
Since B/C > 1.0, the canals should be extended.
Chapter 9
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The disbenefit of $15,000 per year and the dredging cost each third year have
reduced the B/C ratio to below 1.0; the canals should not be extended now.
(b) AW = C = 1,500,000(A/P,6%,20) + 25,000 + 60,000(P/F,6%,3) + (P/F,6%,6)
+ (P/F,6%,9) + (P/F,6%,12) + (P/F,6%,15) + (P/F,6%,18)(A/P,6%,20)
= 1,500,000 (0.08718) + 25,000 + 60,000 0.8396 + 0.7050 + 0.5919 +
0.4970 + 0.4173 + 0.3503(0.08718)
= $173,560
Annual disbenefit = D = $15,000
Annual revenue = B = $175,000
(B D)/C = (175,000 15,000)/173,560 = 0.922
As above, the disbenefit of $15,000 per year and the dredging cost each third
year have reduced the B/C ratio to below 1.0; the canals should not be
extended now.
Chapter 9
10
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9.22 Alternative B has a larger total annual cost; it must be incrementally justified. Use
PW values. Benefit is the difference in damage costs. For B incrementally over A:
Incr cost = (800,000 600,000) + (70,000 50,000)(P/A,8%,20)
= $200,000 + 20,000(9.8181)
= $396,362
Incr benefit = (950,000 250,000)(P/F,8%,6)
= 700,000(0.6302)
= 441,140
Incr B/C = 441,140/396,362
= 1.11
Select alternative B.
9.23
9.24
Chapter 9
11
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9.25
East coast site has the larger total cost (J17). Set up the spreadsheet to calculate
AW values in $1 million. First, perform B/C on west coast site since do-nothing is
an option. It is justified. Then use incremental values to evaluate East versus
West. It is also justified since (B/C) = 2.05. Select east coast site.
9.26
Eliminate DN
12
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Eliminate program 2
Using the capital recovery costs, solar is the more costly alternative.
cost = (4,500,000 2,000,000)(A/P,0.75%,72)
(150,000 0)(A/F,0.75%,72)
= 2,500,000(0.01803) 150,000(0.01053)
= $43,496
benefits = 50,000 10,000
= $40,000
Incr B/C = 40,000/43,496 = 0.92
Select the conventional system.
9.28
(a) Location E
AW = C = 3,000,000(0.12) + 50,000
= $410,000
Revenue = B = $500,000 per year
Disbenefits = D = $30,000 per year
Location W
AW = C = 7,000,000 (0.12) + 65,000 - 25,000
= $880,000
Revenue = B = $700,000 per year
Disbenefits = D = $40,000 per year
B/C ratio for location E:
(B D)/C = (500,000 30,000)/410,000
= 1.15
Location E is economically justified. Location W is now incrementally
compared to E.
cost of W = 880,000 410,000
= $470,000
Chapter 9
13
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9.28 (cont)
(b) Location E
B = 500,000 30,000 50,000 = $420,000
C = 3,000,000 (0.12) = $360,000
Modified B/C = 420,000/360,000 = 1.17
Location E is justified.
Location W
B = $200,000
D = $10,000
C = (7 million 3 million)(0.12)
= $480,000
M&O = (65,000 25,000) 50,000
= $-10,000
Note that M&O is now an incremental cost advantage for W.
Modified B/C = 200,000 10,000 + 10,000
480,000
= 0.42
Chapter 9
14
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9.29 (cont)
9.30
Find the AW of costs for each technique, order them, and determine the Incr B/C
values.
AW of costs = installed cost(A/P,15%,10) + AOC
Chapter 9
15
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9.30 (cont)
Technique
AW of cost calculation__
15,000(A/P,15%,10) + 10,000
= 15,000(0.19925) + 10,000
= $12,989
19,000(A/P,15%,10) + 12,000
= 19,000(0.19925) + 12,000
= $15,786
25,000(A/P,15%,10) + 9,000
= 25,000(0.19925) + 9,000
= $13,981
33,000(A/P,15%,10) + 11,000
= 33,000(0.19925) + 11,000
= $17,575
Technique 3 vs 1
C = 13,981 12,989 = $992
B = 19,000 15,000 = $4,000
B/C = 4,000/992
= 4.03 > 1
Technique 2 vs 3
C = 15,786 - 13,981 = $1,805
B = 20,000 19,000 = $1,000
B/C = 1,000/1,805
= 0.55 < 1.0
Eliminate technique 2, keep 3.
Technique 4 vs 3
C = 17,575 - 13,981 = $3,594
B = 22,000 -19,000 = $3,000
B/C = 3,000/3,594
= 0.83 < 1.0
Eliminate technique 4, keep 3
Replace the current method with technique 3.
Chapter 9
16
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9.31
Determine the AW of costs for each technique and calculate overall B/C. Select all
four since all have B/C > 1.0.
AW of costs = E$5 - PMT(15%,10,E$4)
1
2
3
4
5
6
7
8
9
10
11
12
9.32
A
Technique
B
1
C
2
D
3
E
4
33,000
Installed cost
15,000
19,000
25,000
AOC
10,000
12,000
9,000
11,000
AW of costs $12,989 $ 15,786 $ 13,981 $ 17,575
Benefits
15,000
20,000
19,000
22,000
B/C
1.15
1.27
1.36
1.25
Select?
Yes
Yes
Yes
Yes
Combine the investment and installation costs, difference in usage fees define
benefits. Use the procedure in Section 9.3 to solve. Benefits are the incremental
amounts for lowered costs of annual usage for each larger size pipe.
1, 2. Order of incremental analysis:
3.
4.
Size
130
150
200
230
17
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B/C = 600/382.03
= 1.57 > 1.0
230 vs 200 mm
C = (17,350 14,580)(A/P,8%,15)
= 2770(0.11683)
= $323.62
B = 5200 4900
= $300
B/C = 0.93 < 1.0
Eliminate 230 mm size.
Select 200 mm size.
9.33
Eliminate DN.
B vs A
C = (90 50)(A/P,10%,5) + (4 3)
= 40(0.26380) + 1
= $11.552
B = (29 20) (1.5 0.5) = 8
B/C = 8/11.552
= 0.69 < 1.0
Eliminate B.
C vs A
C = (200 50)(A/P,10%,5) + (6 3)
= 150(0.26380) + 3
= 42.57
B = (61 20) (2.1 0.5) = 39.4
B/C = 39.4/42.57
= 0.93 < 1.0
Chapter 9
Eliminate C
18
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9.34
Select site A
(a) Calculate the B/C of each proposal for initial screening (row 6). Four
locations are retained F, D, E and G. No need to compare F vs DN since
one site must be selected. Site D is the one selected.
(b) For independent projects, use the B/C values in row 6 of the Excel solution
above and select the largest three of the four with B/C > 1.0. Those selected
for are: D, F, and E.
9.35
9.36
J vs DN
B/C = 1.10 > 1.0
Eliminate DN.
K vs J
B/C = 0.40 < 1.0
Eliminate K.
Chapter 9
19
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L vs J
B/C = 1.42 > 1.0
Eliminate J.
M to L
B/C = 0.08 < 1.0
Eliminate M.
Select alternative L.
Note: K and M can be eliminated initially because they have B/C < 1.0.
9.37
(a) Projects are listed by increasing PW of cost values. First find benefits for each
alternative and then find incremental B/C ratios:
Benefits for P
1.1 = BP /10
BP = 11
Benefits for Q
2.4 = BQ/40
BQ = 96
Benefits for R
1.4 = BR/50
BR = 70
Benefits for S
1.5 = BS/80
BS = 120
Incremental B/C for Q vs P
B/C = 96 11
40 10
= 2.83
Incremental B/C for R vs P
B/C = 70 11
50 10
= 1.48
Incremental B/C for S vs P
B/C = 120 11
80 10
= 1.56
Chapter 9
20
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Answer is (d)
9.39
Answer is (b)
9.40
Answer is (a)
9.41
Answer is (c)
9.42
Project B/C values are given. Incremental analysis is necessary to select one
alternative. Answer is (d)
9.43
Answer is (c)
9.44
Answer is (a)
Chapter 9
21
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The spreadsheet shows the incremental B/C analysis. The truck should be
purchased. The annual worth values for each alternative are determined using the
equations:
AWpay-per-use = 150,000(A/P,6%,5) + 10(3000) + 3(8000) = $89,609 (cell D15)
AWown = 850,000(A/P,6%,15) + 500,000(A/P,6%,50) + 15(2000) + 5(7000)
= $184,240 (cell F15)
Chapter 9
22
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2. The annual fee paid for 5 years now would have to be negative (cell D5) in that
Brewster would have to pay Medford a retainer fee, so to speak, to possibly use the
ladder truck. This is an economically unreasonable approach.
Excel SOLVER is used to find the breakeven value of the initial cost when B/C = 1.0
(cell F21).
Chapter 9
23
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3.
The building cost of over $2.2 million could be supported by the Brewster proposal
(in cell F7), again found by using SOLVER. This is also not an economically
reasonable alternative.
Chapter 9
24
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4. The estimated sum of premium and property loss would need to be $523,714 or less
(cell F17, SOLVER). This is not much of a reduction from the current estimate of
$600,000.
Chapter 9
25
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839 = 0.406
2069
26
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Chapter 9
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