Chapter 9

Benefit/Cost Analysis and Public Sector Economics

Solutions to Problems
9.1

(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

Some different dimensions are:

1. Contractor is involved in design of highway; contractor is not provided with the
final plans before building the highway.
2. Obtaining project financing may be a partial responsibility in conjunction with
the government unit.
3. Corporation will probably operate the highway (tolls, maintenance,
management) for some years after construction.
4. Corporation will legally own the highway right of way and improvements until
contracted time is over and title transfer occurs.
5. Profit (return on investment) will be stated in the contract.

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

(a) B/C = 600,000 100,000 = 1.11

450,000
(b) B-C = 600,000 100,000 450,000 = $+50,000

Chapter 9

(b) Private
(b) Cost

(c) Public

(d) Public

(e) Public

(c) Cost (d) Disbenefit (e) Benefit (f) Disbenefit

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9.7 (a) Use Excel and assume an infinite life. Calculate the capitalized costs for all
annual amount estimates.

(b) Change cell D6 to $200,000 to get B/C = 1.023.

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9.8

1.0 = (12)(value of a life)_

(200)(90,000,000)
Value of a life = $1.5 billion

9.9

Annual cost = 30,000(0.025)

= $750 per year/household
Let x = number of households
Total annual cost, C = (750)(x)
Let y = $ health benefit per household for the 1% of households
Total annual benefits, B = (0.01x)(y)
1.0 = B/C = B/(750)(x)
B = (750)(x)
Substitute B = (0.01x)(y)
(0.01x)(y) = 750x
y = $75,000 per year

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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.
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9.12

Cost = 150,000(A/P,3%,20) + 12,000

= 150,000(0.06722) + 12,000
= $22,083 per year
Benefits = 24,000(2)(0.50)
= $24,000 per year
B/C = 24,00/22,083 = 1.087
The project is marginally economically justified.

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

P = [(600,000/1.3) 300,000]/0.07 = $2,307,692

(b) Spreadsheet solution: Set up the spreadsheet to calculate P = $2,307,692.

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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.

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9.15

1.7 = 150,000 M&O costs_

1,000,000(A/P,6%,30)
1.7 = 150,000 M&O costs
1,000,000(0.07265)
M&O costs = $26,495 per year

9.16 Convert all estimates to PW values.

PW disbenefits = 45,000(P/A,6%,15)
= 45,000(9.7122)
= $437,049
PW M&O Cost = 300,000(P/A,6%,15)
= 300,000(9.7122)
= $2,913,660
B/C = 3,800,000 437,049__
2,200,000 + 2,913,660
= 3,362,951/5,113,660
= 0.66
9.17 (a) AW of Cost = 30,000,000(0.08) + 100,000
= $2,500,000 per year
B/C = 2,800,000
2,500,000

= 1.12

Construct the dam.

(b) Calculate the CC of the initial cost to obtain AW for denominator.

B/C =

1.12

B/C = (2,800,000)/(100,000+30,000,000*(0.08))

9.18 AW = C = 2,200,000(0.12) + 10,000 + 65,000(A/F,12%,15)

= 264,000 + 10,000 + 65,000(0.02682)
= $275,743
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Annual Benefit = B = 90,000 10,000 = $80,000

B/C = 80,000/ 275,743 = 0.29
Since B/C < 1.0, the dam should not be constructed.

9.19 Calculate the AW of initial cost, then the 3 B/C measures of worth. The roadway
should not be built.

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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.

(b) For modified B/C ratio,

C = 1,500,000(A/P,6%,20) = $130,770
B = 175,000 25,000 = 150,000
Modified B/C = 150,000/130,770
= 1.15
Since modified B/C > 1.0, canals should be extended.
9.21 (a) Determine the AW of the initial cost, annual cost and recurring dredging cost,

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then calculate (B D)/C.

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.
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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

Annual cost of long route = 21,000,000(0.06) + 40,000 + 21,000,000(0.10)

(A/F,6%,10)
= 1,260,000 + 40,000 + 2,100,000(0.07587)
= $1,459,327
Annual cost of short route = 45,000,000(0.06) + 15,000 + 45,000,000(0.10)
(A/F,6%,10)
= 2,700,000 + 15,000 + 4,500,000(0.07587)
= $3,056,415
The short route must be incrementally justified.
Extra cost for short route = 3,056,415 1,459,327
= $1,597,088
Incremental benefits of short route = 400,000(0.35)(25 10) + 900,000
= $3,000,000
Incr B/Cshort = 3,000,000
1,597,088
= 1.88
Build the short route.

9.24

Justify extra cost of downtown (DT) location.

Extra cost for DT site = 11,000,000(0.08)
= $880,000
Extra benefits for DT site = 350,000 + 400,000
= $750,000
Incremental B/CDT = 750,000/880,000
= 0.85
The city should build on the west side site.

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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

First compare program 1 to do-nothing (DN).

Cost/household/mo = $60(A/P,0.5%,60)
= 60(0.01933)
= $1.16
B/C1 = 1.25/1.16
= 1.08

Eliminate DN

Compare program 2 to program 1.

cost = 500(A/P,0.5%,60) 60(A/P,0.5%,60)
= (500 60)(0.01933)
= $8.51
benefits = 8 1.25
= $6.75
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Incr B/C2 = 6.75/8.51

= 0.79

Eliminate program 2

The utility should undertake program 1.

9.27

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

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9.28 (cont)

benefits of W = 700,000 500,000

= $200,000
Incr disbenefits of W = 40,000 30,000
= $10,000
Incr B/C = (B D)/C = (200,000 10,000)/470,000
= 0.40
Since incr(B D)/C < 1, W is not justified. Select location E.

(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

W is not justified; select location E.

9.29 Set up the spreadsheet to find AW of costs, perform the initial B/C analyses using
cell reference format. Changes from part to part needed should be the estimates
and possibly a switching of which options are incrementally justified. All 3
analyses are done on a rolling spreadsheet shown below.
(a) Bob: Compare 1 vs DN, then 2 vs 1. Select option 1.
(b) Judy: Compare 1 vs DN, then 2 vs 1. Select option 2.
(c) Chen: Compare 2 vs DN, then 1 vs 2. Select option 2 without doing the B/C
analysis, since benefits minus disbenefits for 1 are less, but this option has a
larger AW of costs than option 2.

Chapter 9

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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

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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

Order of incremental analysis is: DN, 1, 3, 2, 4.

Technique 1 vs DN (current)
B/C = 15,000/12,989
= 1.15 > 1.0

Eliminate DN, keep technique 1.

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

Eliminate technique 1, keep 3.

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.
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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

Total first cost, $ 9,780 11,310 14,580 17,350

Annual benefits, $ -200
600
300
Not used since the benefits are defined by usage costs.

5-7. Determine incremental B and C and select at each pairwise comparison of

defender vs challenger.
150 vs 130 mm
C = (11,310 9,780)(A/P,8%,15)
= 1,530(0.11683)
= $178.75
B = 6,000 5,800
= $200
B/C = 200/178.75
= 1.12 > 1.0
Eliminate 130 mm size.
200 vs 150 mm
C = (14,580 11,310)(A/P,8%,15)
= 3270(0.11683)
= $382.03
B = 5800 5200
= $600
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B/C = 600/382.03
= 1.57 > 1.0

Eliminate 150 mm size.

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

Compare A to DN since it is not necessary to select one of the sites.

A vs DN
AW of Cost = 50(A/P,10%,5) + 3
= 50(0.26380) + 3
= 16.19
AW of Benefits = 20 0.5
= 19.5
B/C = 19.5
16.19
= 1.20 > 1.0

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
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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

(a) An incremental B/C analysis is necessary between Y and Z, if these are

mutually exclusive alternatives.
(b) Independent projects. Accept Y and Z, since B/C > 1.0.

9.36

J vs DN
B/C = 1.10 > 1.0

Eliminate DN.

K vs J
B/C = 0.40 < 1.0

Eliminate K.

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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

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Incremental B/C for R vs Q

B/C = 70 96
50 40
= -2.60
Disregard due to less B for more C.
Incremental B/C for S vs Q
B/C = 120 96
80 40
= 0.60
Incremental B/C for S vs R
B/C = 120 70
80 50
= 1.67
(b) Compare P to DN; eliminate DN.
Compare Q to P; eliminate P.
Compare R to Q; disregarded.
Compare S to Q; eliminate S.
Select Q.
FE Review Solutions
9.38

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)

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limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.

Extended Exercise solution

1.

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)

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reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.

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).

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reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.

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.

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reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.

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.

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reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.

Case Study Solution

1. Installation cost = (3,500)87.8/(0.067)(2)
= (3,500)(655)
= $2,292,500
Annual power cost = (655 poles)(2)(0.4)(12)(365)(0.08)
= $183,610
Total annual cost = 2,292,500(A/P,6%,5) + 183,610
= $727,850
If the accident reduction rate is assumed to be the same as that for closer spacing of
lights,
B/C = 1,111,500/727,850
= 1.53
2. Night/day deaths, unlighted = 5/3 = 1.6
Night/day deaths, lighted = 7/4 = 1.8
3. Installation cost = 2,500(87.8/0.067)
= $3,276,000
Total annual cost = 3,276,000(A/P, 6%, 5) + 367,219
= $1,144,941
B/C = 1,111,500/1,144,941
= 0.97
4. Ratio of night/day accidents, lighted =

839 = 0.406
2069

If the same ratio is applied to unlighted sections, number of accidents prevented

where property damage was involved would be calculated as follows:
0.406 = no. of accidents
379
no. accidents = 154
no. prevented = 199 154 = 45
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reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.

5. For lights to be justified, benefits would have to be at least $1,456,030 (instead of

$1,111,500). Therefore, the difference in the number of accidents would have to be:
1,456,030 = (difference)(4500)
Difference = 324
No. of accidents would have to be = 1086 324 = 762
Night/day ratio = 762 = 0.368
2069

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reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.