10212-10-16P

AID: 1825 | 15/10/2013

Given information:
Alternative

I.
II.
III.

Equivalent
Expected
Annual Cost of Annual Flood
Project
Damage
(1)
(2)
flood 0
$100,000

No
control
Construct
$30,000
levees
Build small $100,000
dam

Annual
Benefits
(3)
$0

Total
Equivalen
t Cost
(1+2)
$100,000

$80,000

$112,000

$110,000

$5,000

$110,000

$105,000

Benefit or cost ratio: (Alternative I)

Annual Benefit and Annual costs are given as $0 and $100,000.Benefit or cost ratio can
be calculated using following formula:
Benefit or Cost can be calculated using following formula:
Benefit and Cost =

Annual Benefit
Annual Cost

(1)

Substitute the respective values in Equation (1), this is done below:

0
100,000
0

Benefit and Cost =

Since, the Benefit and Cost is 0, as it is less than one, it can be concluded that Alternative
I is not justified.
Benefit or cost ratio: (Alternative II)
Substitute the respective values in Equation (1), this is done below:
112, 000
110,000
1.02

Benefit and Cost =

Since, the Benefit and Cost is 1.02, as it is greater than one, it can be concluded that
Alternative II is justified.
Benefit or cost ratio: (Alternative III)
Substitute the respective values in Equation (1), this is done below:
110, 000
105, 000
1.05

Benefit and Cost =

Since, the Benefit and Cost is 1.05, as it is greater than one, it can be concluded that
Alternative III is justified.
a.
Maximum benefit
Maximum benefit of Alternative I, II and III are given as $0 $112,000 and $110,000
respectively. Since, Alternative II has comparatively greater level of benefit. It can be
concluded that Alternative II (Construct levees) should be chosen.
b.
Maximum cost
Maximum cost of Alternative I, II and III are given as $100,000, $110,000 and $105,000
respectively. Since, Alternative I have comparatively lesser level of cost. It can be
concluded that Alternative I (No flood control) should be chosen.
c.
Maximum benefit-cost ratio
Maximum benefit-cost of Alternative I, II and III are given as 0, 1.02 and $1.05
respectively. Since, Alternative III has comparatively greater level of cost. It can be
concluded that Alternative III (Small dam) should be chosen.
d.
Investment have Benefit cost ratio greater than one

Based on benefit cost ratio, it can be concluded that, small dam has the least benefit cost
ratio. Calculation if incremental cost ratio: This is done below:
Small dam No control

Change in Benefit and Cost

formula, this is done below:

can be calculated using following

B Annual Benefit of Small dam Annual Benefit of No control

=
C
Annual Cost of Small dam Annual Cost of No control
Substitute the respective values in the above Equation, this is done below:
110, 000 0
105,000 110,000
110,000

5000
22

Small dam No control =

Since, the incremental Benefit and Cost is 22, as this value is greater than one, it can be
concluded that this project is justified.
Incremental analysis
Levees Small dam
Change in Benefit and Cost
formula, this is done below:

can be calculated using following

B Annual Benefit of Levees Annual Benefit of Small dam

=
C
Annual Cost of Levees Annual Cost of Small dam
Substitute the respective values in the above Equation, this is done below:

112, 000 110,000

115,000 105,000
2, 000

5, 000
0.4

Levees Small dam =

Since, the incremental Benefit and Cost is 0.4, as this value is lesser than one, it can be
concluded that this project is not justified.
Conclusion
Small dam No control

From the above part, it can be concluded that

is 22, which is
Levees Small dam
greater than one and
is 0.4, which is lesser than one. Hence, small
dam is chosen.
e.
Largest Benefit cost ratio:
According to benefit cost ratio analysis and incremental cost analysis, small dam has the
largest benefit cost ratio.