BENEFIT/COST ANALYSIS

Dr.K.Ananthanarayanan
Associate professor
Department of Cii! En"ineerin"
In#ian Instit$te of Techno!o"y% &a#ras

BENEFIT COST ANALYSIS
Common!y 'se# metho# for ea!$atin" the (orth of a
propose# pro)ect
&etho# consists of comparin" ann$a! (orth of the
*enefits of a propose# pro)ect% to the ann$a! (orth of
costs
+resent (orth or fina! (orth may *e $se#% *$t ann$a!
(orth is most common!y $se#
Example:
Proposed estimated benefits = Rs 2,00,000/Yr
Cost = Rs 1,00,000/Yr
Benefit/cost = 2.0
A common $se of the B/C ratio metho# is to ran, ario$s
p$*!ic (or,s proposa!s on the *asis of their B/C ratio
an# se!ect the one or ones (ith the hi"hest B/C ratio

B/C ANALYSIS
The proper ran,in" of pro)ects re-$ires f$rther
e.amination% an# mere!y ran,in" in or#er of
n$merica! B/C ratios may !ea# to erroneo$s
conc!$sions
B/C R!"#$
Ca!c$!ate a!! *enefits an# costs on an ann$a! *asis
Initia! costs conerte# to e-$ia!ent ann$a! cost *y
app!ication of /A/+%i%n0 factor
Simi!ar!y sa!a"e a!$e% "ra#ient cost an# income
conerte# to ann$a! costs

SI1N CON2ENTION

Conentiona! metho# 3 ne"atie B/C ratio

To ma,e positie treat a!! increases in

*enefits /s$ch as re#$ction in $ser costs0 as
positie (hen in n$merator % an# a!! increases
in costs as positie (hen in #enominator

BENEFIT COST ANALYSIS
C#$! Rs
B
E
%
E
&
"
!
$

R
s
B
/
C

=

1
.
0
B/C ' 1.0
B/C (1.0
Re)ected re*ion
ccepted re*ion
# Pro) +
# Pro) x
# Pro) ,

'SE4 BENEFITS

-.en p/blic facilities are constr/cted, t.e /ser en)o,s

some sa0in*s in costs 1s/c. as tra0el costs2 3.en t.e ne3
facilit, in compared to t.e old one

Sain"s may *e #$e to

Less time re-$ire# to trae! certain #istance
Lo(er f$e! cons$mption
Less (ear

Fe(er acci#ents% etc.

%et /ser benefits
'p5Tota! ann$a! cost to the $ser for the present faci!ity
'f 5Tota! ann$a! cost to the same n$m*er of $sers for the f$t$re
faci!ity
4n = 4p 5 4f

#-%ER6$ C#$!$

T(o cate"ories

#-%ER6$ C#$!
7"%!E%%CE
C#$!$
CP"!8 C#$!$

Capita! costs 6 constr$ction% ac-$isition or

other capita! costs

If rep!acement 6 ho( to han#!e the present

a!$e of the e.istin" faci!ity7

The present a!$e is the cash sa!a"e a!$e

that (o$!# *e receie# no( if the faci!ity (ere
so!# or #emo!ishe#

If the e.istin" faci!ity is maintaine# in p!ace%

this cash a!$e is !eft ineste# in the e.istin"
faci!ity
CP"!8 C#$!$

The cost of the propose# faci!ity is not re#$ce# *y the

(orth of the e.istin" faci!ity since the a!$e of the
e.istin" faci!ity is an o(ner8s asset

Cf 5 e-$ia!ent capita! cost of propose# faci!ity%

$s$a!!y e.presse# on an ann$a!i9e# *asis.

Cp 5 E-$ia!ent capita! cost of the e.istin" faci!ity

/present sa!a"e a!$e0% $s$a!!y e.presse# on an
ann$a!i9e# *asis

C$ 5 Net capita! cost of rep!acin" the present faci!ity
(ith the f$t$re Faci!ity
C/ = Cf 5 Cp
CP"!8 C#$!$

7"%!E%%CE C#$!$

&f 5 E-$ia!ent operatin" an# maintenance

costs of the f$t$re faci!ity

&p 5 E-$ia!ent operatin" an# maintenance

cost of the e.istin" faci!ity

&n 5 Net operatin" an# maintenance cost of

the propose# faci!ity oer the present faci!ity.
Either positie or ne"atie
7n = 7f 5 7p

$E9ER8 7E!:#;$ &#R
C8C48!"%< B/C R!"#

&a)or pro*!em 6 #eci#in" (hich items to inc!$#e in

costs an# (hich items to inc!$#e in *enefits

Seera! ariations of metho#s e.ist.

T(o common approaches

1.Conventional B/C method
2. Modified B/C method

Both metho#s ino!e a comparison of a propose#

faci!ity (ith an e.istin" faci!ity.

If there is no e.istin" faci!ity% $se the present cost of

reachin" the same o*)ectie

C#%9E%!"#%8 B/C 7E!:#;
Benefits are #etermine# for $sers
Bn5'n 5 Net ann$a! *enefits /sain" costs0 thro$"h safety
improements% #ecrease# "aso!ine cons$mption
#ecrease# tire (ear% etc.

'p 5 'ser cost of present faci!ity

'f 5 'ser cost of the propose# faci!ity
Cn : &n 5 costs consist of the ann$a! e-$ia!ent costs
to the o(ner of the faci!ity% inc!$#in" capita!
cost an# maintenance
'n 5 'p6 'f

C#%9E%!"#%8 B/C
Net sain"s to $sers

Conentiona! B/C 5 O(ner8s net O(ner8s net
capita! cost O;& costs
Con0entional B/C = 1 4n / 1Cn = 7n22
= 1 Bn / 1Cn = 7n22
Si"n notation< In the #enominator any increase in
costs res$!ts in a net positie cost

7#;"&"E; B/C 7et.od

This metho# $ses the same inp$t #ata *$t net

operatin" an# maintenance costs /&n0 are
treate# as ne"atie *enefits /or #is*enefits0
rather than as costs. Th$s% they are p!ace# in
the n$merator
&o#ifie# B/C 5 // 'n6 &n0/ Cn 0
5 // Bn6 &n0/ Cn 0

The mo#ifie# B/C metho#s $s$a!!y yie!#s

more consistent res$!ts.

-:! !# C#7PRE

Benefit/ cost st$#ies *y their ery nat$re ino!e a

comparison of t(o or more a!ternaties.

One of these a!ternaties sho$!# *e an e.istin"

faci!ity or metho# or erroneo$s res$!ts may occ$r.

For e.amp!e% it is possi*!e to compare an e.pensie

ne( *ri#"e across a *ay (ith a more e.pensie ne(
t$nne!. The res$!t (o$!# *e a recommen#ation for
constr$ction of the *ri#"e% simp!y *eca$se the
e.istin" ro$te ino!in" a short trip aro$n# the en# of
the *ay (as not consi#ere#

Sometimes there is no e.istin" faci!ity
E.amp!e<
=.Enironmenta! re"$!ation 6 se(era"e treatment p!ant
>. Ne( faci!ity re-$ire# #$e to increase# pop$!ation "ro(th.

'ser *enefits in the B/C ratio are or#inari!y s$ppose# represent

the re#$ction in the $ser8s cost res$!tin" from constr$ction of the
ne( faci!ity.

?here there is no faci!ity it is #iffic$!t to esta*!ish a !e"itimate

re#$ction in cost.

Some peop!e fi!! this oi# *y (ith a s$*stit$te a!ternatie of their

of o(n se!ection to rep!ace the missin" e.istin" faci!ity
4aises some critica! -$estions
WHAT TO COMPARE....

&4R!:ER C#77E%!$ #% B/C
R!"#$

'n#er certain circ$mstances one or the other B/C

ratios may not *e s$ita*!e at a!!
Some e.tremes<
=. @ero sain"s to $sers% then 'n 5 A
Conentiona! B/C 5 'n / /Cn : &n0 5 A
&o#ifie# B/C 5 /'n 3 &n0 / Cn 5 6 &n / Cn
+ro)ect sho$!# *e )$stifia*!e% if sain"s in
maintenance an# operatin" costs more than offset
the capita! costs. This co$!# *e #emonstrate# (ith
the conentiona! B/C% *$t co$!# not *e *y the
mo#ifie# B/C

&4R!:ER C#77E%!$ #% B/C
R!"#$

If the pro)ect res$!ts in sain"s to $sers /'n is

:0% an# maintenance ; operatin" costs #rop
*y more than the capita! costs rise /Cn : &n
is 60% then
Conentiona! B/C 5 'n / /Cn : &n0 B A
&o#ifie# B/C 5 /'n 3 &n0 / Cn C =

The conentiona! B/C ratio *ecomes a 3e

n$m*er% (here as the mo#ifie# B/C proper!y
acco$nts for the *enefit of !o(er maintenance
to the o(ner.

&4R!:ER C#77E%!$ #% B/C
R!"#$

If there is no chan"e in the capita! inestment

re-$ire# /Cn 5 A0
Conentiona! B/C 5 'n / /Cn : &n0 5 'n / &n
&o#ifie# B/C 5 /'n 3 &n0 / Cn 5 D
Conentiona! metho# sho$!# *e $se# here.