İMÜ 376 - ENGINEERING ECONOMICS

2020-2021 FALL SEMESTER

PROBLEM SET 5

Q1. A new motorway that can serve for 50 years will be constructed in a touristic region of
Turkey. The planned project cost is given as 450 000 000 TL. Operating costs at the end of the
first year will be 5 000 000 TL, which increases by 500 000 TL annually. The annual income
of the road will be 75 000 000 TL. Due to agricultural losses in the farmlands, there will be a
yearly disbenefit of 200 000 TL. On the other hand, thanks to the contribution to the tourism
potential of the region, the new road will provide an additional yearly income of 1 750 000 TL
to the people living in the region. By carrying out a benefit-cost analysis with a 16% interest
rate per year, determine whether the new motorway is feasible or not.

Solution:

A = 200 000 TL (Disbenefit)

0 A = 1 750 000 TL (Benefit)

50
5 000 000 TL
G = 500 000 TL
(Cost)

A = 75 000 000 TL (Income)

450 000 000 TL

(Cost)

AEBenefit = 1750000 – 200000 = 1 550 000 TL

AECost = 450000000 (A/P, 16%, 50) + [5000000 + 500000 (A/G, 16%, 50)] – 75000000
AECost = 450000000 * 0.1601 + [5000000 + 500000 * 6.2201] – 75000000 = 5 155 050 TL

BAE / CAE = 1550000 / 5155050 = 0.301 < 1 ⇒ Project is not feasible

Page 1 of 24
OR
PWBenefit = 1750000 (P/A, 16%, 50) – 200000 (P/A, 16%, 50)
PWBenefit = 1750000 * 6.2463 – 200000 * 6.2463 = 9 681 765 TL

PWCost = 450000000 + [5000000 + 500000 (A/G, 16%, 50)] (P/A, 16%, 50) –
75000000 (P/A, 16%, 50)
PWCost = 450000000 + [5000000 + 500000 * 6.2201] * 6.2463 –
75000000 * 6.2463 = 32 185 305.32 TL

BPW / CPW = 9681765 / 32185305.32 = 0.301 < 1 ⇒ Project is not feasible

Q2. In order to overcome the agricultural problems in an arid region, an irrigation canal project
will be undertaken. The initial cost of the project will be 75 000 000 TL and the yearly
maintenance cost will be 1 000 000 TL. In addition, there will be a canal dredging cost of
5 000 000 TL every 5 years. While the annual disbenefit associated with the project is estimated
to be 1 500 000 TL, the agricultural revenue of the project will be 12 500 000 TL. By carrying
out a benefit-cost analysis with the present worth approach, determine whether the canal project
that has a service life of 30 years should be undertaken or not. The interest rate is given as 8%
per year.

Solution:

A = 1 500 000 TL (Disbenefit)

A = 12 500 000 TL (Benefit)

0 5 10 15 20 25
30
A = 1 000 000 TL (Cost)

5 000 000 TL 5 000 000 TL 5 000 000 TL 5 000 000 TL 5 000 000 TL
(Cost) (Cost) (Cost) (Cost) (Cost)

75 000 000 TL
(Cost)

Page 2 of 24
PWBenefit = 12500000 (P/A, 8%, 30) – 1500000 (P/A, 8%, 30)
PWBenefit = 12500000 * 11.2578 – 1500000 * 11.2578 = 123 835 800 TL

PWCost = 75000000 + 1000000 (P/A, 8%, 30) + 5000000 (P/F, 8%, 5) + 5000000 (P/F, 8%, 10)
+ 5000000 (P/F, 8%, 15) + 5000000 (P/F, 8%, 20) + 5000000 (P/F, 8%, 25)
PWCost = 75000000 + 1000000 * 11.2578 + 5000000 * 0.6806 + 5000000 * 0.4632
+ 5000000 * 0.3152 + 5000000 * 0.2145 + 5000000 * 0.1460 = 95 355 300 TL

BPW / CPW = 123835800 / 95355300 = 1.299 > 1 ⇒ Project should be undertaken

Q3. An airport extension project requires 10 000 000 TL for the expropriation of some
farmlands. The design and construction cost of the project is estimated to be 20 000 000 TL
and 300 000 000 TL, respectively. There will be also a yearly maintenance and operating cost
of 5 000 0000 TL at the end of the first year, which increases by 250 000 TL thereafter. Besides,
some new employees are needed to manage the additional flights of the extended airport. Their
yearly salary, which increases by 30 000 TL each year, is estimated to be 600 000 TL at the
end of the first year. The yearly expected income of the airport, which will be operational for
40 years, is 30 000 000 TL for the first 20 years and 20 000 000 TL for the last 20 years. The
project will contribute to the public by creating new rental areas worth 6 000 000 TL per year.
The yearly benefit associated with the transportation convenience of the city residents is
estimated to be 2 500 000 TL. The project is also expected to bring an additional tourism
income of 1 000 000 TL annually. On the other hand, farmlands damaged during the
construction result in a yearly agricultural loss of 1 500 000 TL. By carrying out a benefit-cost
analysis with the annual equivalence approach, determine whether the airport extension project
is feasible or not. The interest rate is given as 10% per year.

Page 3 of 24
Solution:

A = 1 500 000 TL (Disbenefit)

A = 1 000 000 TL (Benefit)

A = 2 500 000 TL (Benefit)

A = 6 000 000 TL (Benefit)

0 20
40
600 000 TL & G = 30 000 TL (Cost)

5 000 000 TL
G = 250 000 TL
(Cost)

A = 30 000 000 TL (Income) A = 20 000 000 TL (Income)

300 000 000 TL (Cost)

20 000 000 TL (Cost)

10 000 000 TL (Cost)

AEBenefit = 6000000 + 2500000 + 1000000 – 1500000 = 8 000 000 TL

AECost = 300000000 (A/P, 10%, 40) + 20000000 (A/P, 10%, 40) + 10000000 (A/P, 10%, 40)
+ [600000 + 30000 (A/G, 10%, 40)] + [5000000 + 250000 (A/G, 10%, 40)] –
30000000 (P/A, 10%, 20) (A/P, 10%, 40) – 20000000 (F/A, 10%, 20) (A/F, 10%, 40)
AECost = 300000000 * 0.1023 + 20000000 * 0.1023 + 10000000 * 0.1023
+ [600000 + 30000 * 9.0962] + [5000000 + 250000 * 9.0962] –
30000000 * 8.5136 * 0.1023 – 20000000 * 57.2750 * 0.0023 = 13 143 047.60 TL

BAE / CAE = 8000000 / 13143047.60 = 0.609 < 1 ⇒ Project is not feasible

Page 4 of 24
Q4. A new highway will be constructed to improve the accessibility of a region in Turkey. The
initial cost of the project is predicted as 50 000 000 TL. In addition to annual maintenance and
operating cost of 2 500 000 TL, there will be a resurfacing cost of 5 000 000 TL every 10 years.
As a result of the improved accessibility, the project is expected to bring 5 000 000 TL per year
for the public. This number will increase by 200 000 TL annually. Contrary to this income,
environmental damage of the project causes a loss of 1 000 000 TL each year. The interest rate
is given as 9% per year.
a) By carrying out a benefit-cost analysis with the annual equivalence approach, determine
whether the highway project that has a service life of 50 years should be constructed or
not.
b) If the project is rejected, what must be the annual increase amount of public income to
make the project economically feasible?

Solution:

A = 1 000 000 TL (Disbenefit)

5 000 000 TL
G = 200 000 TL
0 10 20 (Benefit) 30 40
50
A = 2 500 000 TL (Cost)

5 000 000 TL 5 000 000 TL 5 000 000 TL 5 000 000 TL

(Cost) (Cost) (Cost) (Cost)

50 000 000 TL
(Cost)

a) AEBenefit = [5000000 + 200000 (A/G, 9%, 50)] – 1000000

AEBenefit = [5000000 + 200000 * 10.4295] – 1000000 = 6 085 900 TL

Page 5 of 24
 AECost = [50000000 + 5000000 (P/F, 9%, 10) + 5000000 (P/F, 9%, 20) +
5000000 (P/F, 9%, 30) + 5000000 (P/F, 9%, 40)] (A/P, 9%, 50) + 2500000
AECost = [50000000 + 5000000 * 0.4224 + 5000000 * 0.1784 +
5000000 * 0.0754 + 5000000 *0.0318] * 0.0912 + 2500000 = 7 382 848 TL

BAE / CAE = 6085900 / 7382848 = 0.824 < 1 ⇒ Project should not be constructed

b) In order to make the project economically feasible:

AEBenefit = AECost
[5000000 + X (A/G, 9%, 50)] – 1000000 = 7382848
X * 10.4295 = 3382848
⇒ X = 324 353.80 TL

Annual increase amount of public income must be 324 353.80 TL.

Page 6 of 24
Q5. A high-speed train project will be undertaken to improve the public transportation between
two major cities of Turkey. The project can be constructed on two possible routes having
different benefit-cost estimations. The numbers estimated for both routes are tabulated below.
By carrying out an incremental benefit-cost analysis with the annual equivalence approach,
decide which route should be selected. The interest rate is given as 5% per year.
Benefit/Cost Item Route 1 Route 2
Initial Cost $100 000 000 $125 000 000
Service Life 20 years 20 years
$2 000 000 for the first
1st year: $500 000
Yearly Maintenance and 10 years
Increases
Operating Cost $3 000 000 for the last
$200 000/year
10 years
Yearly Benefit Caused by the
$10 000 000 $15 000 000
Transportation Convenience
Yearly Disbenefit Caused by
N/A $3 000 000
the Environmental Damage

Solution:

For Route 1:

A = $ 10 000 000 (Benefit)

0 10
20 ROUTE 1

A = $ 2 000 000 (Cost) A = $ 3 000 000 (Cost)

$ 100 000 000

(Cost)

AEBenefit-R1 = $ 10 000 000

AECost-R1 = 100000000 (A/P, 5%, 20) + 2000000 (P/A, 5%, 10) (A/P, 5%, 20) +
3000000 (F/A, 5%, 10) (A/F, 5%, 20)
AECost-R1 = 100000000 * 0.0802 + 2000000 * 7.7217 * 0.0802 +
3000000 * 12.5779 * 0.0302 = $ 10 398 118.42

Page 7 of 24
For Route 2:

A = $ 3 000 000 (Disbenefit)

A = $ 15 000 000 (Benefit)

0
20 ROUTE 2

$ 500 000
G = $ 200 000
(Cost)

$ 125 000 000

(Cost)

AEBenefit-R2 = 15000000 – 3000000 = $ 12 000 000

AECost-R2 = 125000000 (A/P, 5%, 20) + [500000 + 200000 (A/G, 5%, 20)]
AECost-R2 = 125000000 * 0.0802 + [500000 + 200000 * 7.9030] = $ 12 105 600

AECost-R1 < AECost-R2 ⇒ Current Best: Route 1 & Challenger: Route 2

BAER2 −AER1 12000000 − 10000000
= = 1.171 > 1 ⇒ Current best is eliminated
CAER2−AER1 12105600 − 10398118.42

⇒ Select Route 2

Page 8 of 24
Q6. In order to meet the increasing energy demand of a city, a dam will be constructed based
on the B/C analysis of 3 alternative designs, namely embankment, gravity, and arch dams. The
benefit-cost values of each dam estimated by the engineers of the local municipality are
tabulated below. The interest rate is given as 3% per year.
a) Calculate the individual B/C ratio of each design alternative with the annual
equivalence approach.
b) By carrying out an incremental benefit-cost analysis with the present worth approach,
decide which dam should be constructed.
Embankment Gravity Arch
Benefit/Cost Item
Dam Dam Dam
Initial Cost €20 000 000 €80 000 000 €100 000 000
Service Life 10 years 50 years 25 years
Yearly Maintenance and
€150 000 €100 000 €75 000
Operating cost
Yearly Income Caused by the
€2 000 000 €3 100 000 €5 500 000
Energy Production
Yearly Benefit Caused by the
€500 000 €300 000 €400 000
Tourism Potential of the Dam
Yearly Disbenefit Caused by the
€50 000 €200 000 €100 000
Damage to the Fish Population

Solution:

a) Individual B/C Values:

For Embankment Dam:

A = € 50 000 (Disbenefit)

0 A = € 500 000 (Benefit)

10 Embankment Dam
A = € 150 000 (Cost)

A = € 2 000 000 (Income)

€ 20 000 000
(Cost)

Page 9 of 24
AEBenefit-ED = 500000 – 50000 = € 450 000

AECost-ED = 20000000 (A/P, 3%, 10) + 150000 – 2000000

AECost-ED = 20000000 * 0.1172 + 150000 – 2000000 = € 494 000

BAE / CAE = 450000 / 494000 = 0.911

For Gravity Dam:

A = € 200 000 (Disbenefit)

0 A = € 300 000 (Benefit)

50 Gravity Dam
A = € 100 000 (Cost)

A = € 3 100 000 (Income)

€ 80 000 000
(Cost)

AEBenefit-GD = 300000 – 200000 = € 100 000

AECost-GD = 80000000 (A/P, 3%, 50) + 100000 – 3100000

AECost-GD = 80000000 * 0.0389 + 100000 – 3100000 = € 112 000

BAE / CAE = 100000 / 112000 = 0.893

Page 10 of 24
For Arch Dam:

A = € 100 000 (Disbenefit)

A = € 400 000 (Benefit)

0
25 Arch Dam
A = € 75 000 (Cost)

A = € 5 500 000 (Income)

€ 100 000 000

(Cost)

AEBenefit-AD = 400000 – 100000 = € 300 000

AECost-AD = 100000000 (A/P, 3%, 25) + 75000 – 5500000

AECost-AD = 100000000 * 0.0574 + 75000 – 5500000 = € 315 000

BAE / CAE = 300000 / 315000 = 0.952

b) Incremental B/C Analysis (Common multiple of lives = 50 years):

For Embankment Dam:

A = € 50 000 (Disbenefit)

0 10 20 A = € 500 000 (Benefit) 30 40

50 Embankment Dam
A = € 150 000 (Cost)

€ 20 000 000
(Cost)
€ 20 000 000 € 20 000 000 € 20 000 000 € 20 000 000
(Cost) (Cost) (Cost) (Cost)

A = € 2 000 000 (Income)

Page 11 of 24
PWBenefit-ED = 500000 (P/A, 3%, 50) – 50000 (P/A, 3%, 50)
PWBenefit-ED = 500000 * 25.7298 – 50000 * 25.7298 = € 11 578 410

PWCost-ED = 20000000 + 20000000 (P/F, 3%, 10) + 20000000 (P/F, 3%, 20) +
20000000 (P/F, 3%, 30) + 20000000 (P/F, 3%, 40) + 150000 (P/A, 3%, 50) –
2000000 (P/A, 3%, 50)
PWCost-ED = 20000000 + 20000000 * 0.7441 + 20000000 * 0.5537 +
20000000 * 0.4120 + 20000000 * 0.3066 + 150000 * 25.7298 –
2000000 * 25.7298 = € 12 727 870

For Gravity Dam:

A = € 200 000 (Disbenefit)

0 A = € 300 000 (Benefit)

50 Gravity Dam
A = € 100 000 (Cost)

A = € 3 100 000 (Income)

€ 80 000 000
(Cost)

PWBenefit-GD = 300000 (P/A, 3%, 50) – 200000 (P/A, 3%, 50)

PWBenefit-GD = 300000 * 25.7298 – 200000 * 25.7298 = € 2 572 980

PWCost-GD = 80000000 + 100000 (P/A, 3%, 50) – 3100000 (P/A, 3%, 50)
PWCost-GD = 80000000 + 100000 * 25.7298 – 3100000 * 25.7298 = € 2 810 600

Page 12 of 24
For Arch Dam:

A = € 100 000 (Disbenefit)

A = € 400 000 (Benefit)

0 25
50 Arch Dam
A = € 75 000 (Cost)

€ 100 000 000

(Cost)
€ 100 000 000
(Cost)

A = € 5 500 000 (Income)

PWBenefit-AD = 400000 (P/A, 3%, 50) – 100000 (P/A, 3%, 50)

PWBenefit-AD = 400000 * 25.7298 – 100000 * 25.7298 = € 7 718 940

PWCost-AD = 100000000 + 100000000 (P/F, 3%, 25) + 75000 (P/A, 3%, 50) –
5500000 (P/A, 3%, 50)
PWCost-AD = 100000000 + 100000000 * 0.4776 + 75000 * 25.7298 –
5500000 * 25.7298 = € 8 175 835

PWCost-GD < PWCost-AD < PWCost-ED ⇒ Current Best: Gravity Dam & Challenger: Arch Dam
BPWAD−PWGD 7718940 − 2572980
= = 0.959 < 1 ⇒ Challanger is eliminated
CPWAD−PWGD 8175835 − 2810600

⇒ Current Best: Gravity Dam & New Challenger: Embankment Dam

BPWED−PWGD 11578410 − 2572980
= = 0.908 < 1 ⇒ Challanger is eliminated
CPWED−PWGD 12727870 − 2810600

⇒ Select Gravity Dam. Although gravity dam has the lowest individual B/C ratio,
according to the incremental B/C analysis, it is more feasible to construct the gravity dam.

Page 13 of 24
Q7. A flood control project will be undertaken to minimize the damages caused by the
occasional floods of a river. Yearly flood damages are expected to be 2 000 000 TL if the
present condition of no flood control is continued. While a channel improvement project can
reduce this number to 1 000 000 TL, a dam and reservoir project enables an additional reduction
of 500 000 TL. Both projects have a service life of 40 years. The initial cost of the channel
improvement project is 20 000 000 TL and the estimated annual cost is 200 000 TL. On the
other hand, the initial cost of the dam and reservoir project is 80 000 000 TL and its annual
cost is estimated to be 1 000 000 TL. Energy production of dam and reservoir project provides
a yearly income of 7 500 000 TL for the government. However, environmental damages of this
project cause an additional disbenefit of 250 000 TL per year. By carrying out an incremental
benefit-cost analysis with the annual equivalence approach, determine what should be done for
the flood control. The interest rate is given as 15% per year. Please consider the ‘do nothing
(no flood control)’ as another option.

Solution:

For No Flood Control:

A = 2 000 000 TL (Disbenefit)

0
40 No flood control
80 000 000 TL (Cost)

AEBenefit-NFC = - 2 000 000 TL

AECost-NFC = 0

For Channel Improvement Project:

A = 1 000 000 TL (Disbenefit)

0
40 Channel improvement project

A = 200 000 TL (Cost)

20 000 000 TL (Cost)

Page 14 of 24
AEBenefit-CIP = - 1 000 000 TL

AECost-CIP = 20000000 (A/P, 15%, 40) + 200000

AECost-CIP = 20000000 * 0.1506 + 200000 = 3 212 000 TL

For Dam and Reservoir Project:

A = 250 000 TL (Disbenefit)

0 A = 500 000 TL (Disbenefit)

40 Dam and reservoir project

A = 1 000 000 TL (Cost)

A = 7 500 000 TL (Income)

80 000 000 TL (Cost)

AEBenefit-DRP = -500000 – 250000 = - 750 000 TL

AECost-DRP = 80000000 (A/P, 15%, 40) + 1000000 – 7500000

AECost-DRP = 80000000 * 0.1506 + 1000000 – 7500000 = 5 548 000 TL

AECost-NFC < AECost-CIP < AECost-DRP ⇒ Current Best: NFC & Challenger: CIP
BAECIP−AENFC −1000000 + 2000000
= = 0.311 < 1 ⇒ Challanger is eliminated
CAECIP−AENFC 3212000 − 0

⇒ Current Best: NFC & New Challenger: DRP

BAEDRP−AENFC −750000 + 2000000
= = 0.225 < 1 ⇒ Challanger is eliminated
CAEDRP−AENFC 5548000 − 0

⇒ Select No Flood Control (Do Nothing)

Page 15 of 24
Q8. A stadium will be constructed to host international sports and concert events in Turkey.
One option is to construct an Olympic stadium having a service life 40 years and a capacity of
100 000 people. The other option is to construct a domed arena having a service life of 50 years
and a capacity of 60 000 people. For the Olympic stadium, a land acquisition cost of
60 000 000 TL is required. Construction cost is estimated to be 500 000 000 TL. Maintenance
and operating cost at the end of the first year is expected to be 2 000 000 TL and it increases
by 200 000 TL per year throughout the service life. There is also a periodic expenditure of
10 000 000 TL every 10 years for the refurbishment of the interior design. Thanks to the events
in the Olympic stadium, the local community will have a yearly tourism income, which is
formulated as '1 000 TL x Stadium Capacity'. For the domed arena, the land acquisition cost is
half of the land acquisition cost in the Olympic stadium and the expected construction cost is
250 000 000 TL. Maintenance and operating cost of the domed arena is estimated to be
1 500 000 TL at the end of the first year and it increases by 300 000 TL per year until the 20th
year. As of 21st year, the maintenance and operating cost would remain the same at
7 500 000 TL per year. The periodic expenditure will be 15 000 000 TL every 10 years. Yearly
tourism income of the domed arena is formulated as '750 TL x Stadium Capacity'. Both
stadiums have adverse consequences for the public because of the consumption of natural
resources. The yearly environmental damage of the Olympic stadium and the domed arena are
forecasted as 10 000 000 TL and 7 500 000 TL, respectively. Finally, salvage values at the end
of the useful lives are given as 18 000 000 TL for the Olympic stadium and 10 000 000 TL for
the domed arena. By carrying out an incremental benefit-cost analysis with the annual
equivalence approach, determine which stadium should be constructed. The interest rate is
given as 12% per year.

Solution:

For Olympic Stadium:

Yearly Benefit = 1000 x Stadium Capacity = 1000 * 100000 = 100 000 000 TL

Page 16 of 24
 A = 10 000 000 TL (Disbenefit)

A = 100 000 000 TL (Benefit)

0 10 20 30
40 Olympic Stadium
2 000 000 TL & G = 200 000 TL (Cost)

10 000 000 TL 10 000 000 TL 10 000 000 TL

(Cost) (Cost) (Cost) A = 18 000 000 TL
(Income)

500 000 000 TL (Cost)

60 000 000 TL (Cost)

AEBenefit-OS = 100000000 – 10000000 = 90 000 000 TL

AECost-OS = [500000000 + 60000000 + 10000000 (P/F, 12%, 10) + 10000000 (P/F, 12%, 20) +
10000000 (P/F, 12%, 30)] (A/P, 12%, 40) + [2000000 + 200000 (A/G, 12%, 40)] –
18000000 (A/F, 12%, 40)
AECost-OS = [500000000 + 60000000 + 10000000 * 0.3220 + 10000000 * 0.1037 +
10000000 * 0.0334] * 0.1213 + [2000000 + 200000 * 7.8988] –
18000000 * 0.0013 = 72 041 248.30 TL

For Domed Arena:

Yearly Benefit = 750 x Stadium Capacity = 750 * 60000 = 45 000 000 TL

Page 17 of 24
 A = 7 500 000 TL (Disbenefit)

A = 45 000 000 TL (Benefit)

0 10 20 30 40
50 Domed Arena
A = 7 500 000 TL (Cost)
1 500 000 TL & G = 300 000 TL (Cost)

A = 10 000 000 TL
15 000 000 TL 15 000 000 TL 15 000 000 TL 15 000 000 TL (Income)
(Cost) (Cost) (Cost) (Cost)

250 000 000 TL (Cost)

30 000 000 TL (Cost)

AEBenefit-DA = 45000000 – 7500000 = 37 500 000 TL

AECost-DA = [250000000 + 30000000 + 15000000 (P/F, 12%, 10) + 15000000 (P/F, 12%, 20)
+ 15000000 (P/F, 12%, 30) + 15000000 (P/F, 12%, 40)] (A/P, 12%, 50) +
[1500000 + 300000 (A/G, 12%, 20)] (P/A, 12%, 20) (A/P, 12%, 50) +
7500000 (F/A, 12%, 30) (A/F, 12%, 50) – 18000000 (A/F, 12%, 50)
AECost-DA = [250000000 + 30000000 + 15000000 * 0.3220 + 15000000 * 0.1037 +
15000000 * 0.0334 + 15000000 * 0.0107] * 0.1204 +
[1500000 + 300000 * 6.0202] * 7.4694 * 0.1204 +
7500000 * 241.3327 * 0.0004 – 18000000 * 0.0004 = 38 250 448.76 TL

AECost-DA < AECost-OS ⇒ Current Best: Domed Arena & Challenger: Olympic Stadium
BAEOS−AEDA 90000000 − 37500000
= = 1.554 > 1 ⇒ Current best is eliminated
CAEOS−AEDA 72041248.30 − 38250448.76

⇒ Select Olympic Stadium

Page 18 of 24
Q9. Flood damages of a river cause a loss of 60 000 000 TL to a city every 5 years. In order to
minimize this loss, the municipality is planning to undertake a flood control project. The first
alternative is to deepen the river channel at a cost of 45 000 000 TL. This option will reduce
the loss that occurred every 5 years to 20 000 000 TL. The second alternative is to construct a
control dam at a cost of 100 000 000 TL. While the dam reduces the flood damages that
occurred every 5 years to 5 000 000 TL, it also causes environmental damage of 250 000 TL
per year. Nonetheless, the irrigation water provided by the dam results in an additional
2 000 000 TL yearly income for the villagers. Annual maintenance and operating cost of the
dam will be 1 000 000 TL. The third alternative is to combine the first two options by both
deepening the river and constructing the control dam. When this option is selected, the flood
damages that occurred every 5 years can reduce to 1 000 000 TL. The other benefit and cost
items to be used in the third alternative will be the same as given in the first two alternatives.
By carrying out an incremental benefit-cost analysis with the present worth approach for 20
years, determine what should be the action of the municipality. The interest rate is given as
11% per year. Please consider the ‘do nothing (no flood control)’ as another option.

Solution:

For No Flood Control:

60 000 000 TL 60 000 000 TL 60 000 000 TL 60 000 000 TL

(Disbenefit) (Disbenefit) (Disbenefit) (Disbenefit)

45 000 000 TL
(Cost)

0 5 10 15
20 ALT-0

PWBenefit-ALT0 = - 60000000 (P/F, 11%, 5) – 60000000 (P/F, 11%, 10) –

60000000 (P/F, 11%, 15) – 60000000 (P/F, 11%, 20)
PWBenefit-ALT0 = - 60000000 * 0.5935 – 60000000 * 0.3522 –
60000000 * 0.2090 – 60000000 * 0.1240 = -76 722 000 TL

PWCost-ALT0 = 0

Page 19 of 24
For Alternative-1:

20 000 000 TL 20 000 000 TL 20 000 000 TL 20 000 000 TL

(Disbenefit) (Disbenefit) (Disbenefit) (Disbenefit)

0 5 10 15
20 ALT-1

45 000 000 TL
(Cost)

PWBenefit-ALT1 = - 20000000 (P/F, 11%, 5) – 20000000 (P/F, 11%, 10) –

20000000 (P/F, 11%, 15) – 20000000 (P/F, 11%, 20)
PWBenefit-ALT1 = - 20000000 * 0.5935 – 20000000 * 0.3522 –
20000000 * 0.2090 – 20000000 * 0.1240 = -25 574 000 TL

PWCost-ALT1 = 45 000 000 TL

For Alternative-2:

5 000 000 TL 5 000 000 TL 5 000 000 TL 5 000 000 TL

(Disbenefit) (Disbenefit) (Disbenefit) (Disbenefit)

A = 250 000 TL (Disbenefit)

A = 2 000 000 TL (Benefit)

0 5 10 15
20 ALT-2

A = 1 000 000 TL (Cost)

100 000 000 TL

(Cost)

Page 20 of 24
PWBenefit-ALT2 = 2000000 (P/A, 11%, 20) – 250000 (P/A, 11%, 20) – 5000000 (P/F, 11%, 5) –
5000000 (P/F, 11%, 10) – 5000000 (P/F, 11%, 15) – 5000000 (P/F, 11%, 20)
PWBenefit-ALT2 = 2000000 * 7.9633 – 250000 * 7.9633 – 5000000 * 0.5935 –
5000000 * 0.3522 – 5000000 * 0.2090 – 5000000 * 0.1240 = 7 542 275 TL

PWCost-ALT2 = 100000000 + 1000000 (P/A, 11%, 20)

PWCost-ALT2 = 100000000 + 1000000 * 7.9633 = 107 963 300 TL

For Alternative-3:

1 000 000 TL 1 000 000 TL 1 000 000 TL 1 000 000 TL

(Disbenefit) (Disbenefit) (Disbenefit) (Disbenefit)

A = 250 000 TL (Disbenefit)

A = 2 000 000 TL (Benefit)

0 5 10 15
20 ALT-3

A = 1 000 000 TL (Cost)

145 000 000 TL

(Cost)

PWBenefit-ALT3 = 2000000 (P/A, 11%, 20) – 250000 (P/A, 11%, 20) – 1000000 (P/F, 11%, 5) –
1000000 (P/F, 11%, 10) – 1000000 (P/F, 11%, 15) – 1000000 (P/F, 11%, 20)
PWBenefit-ALT3 = 2000000 * 7.9633 – 250000 * 7.9633 – 1000000 * 0.5935 –
1000000 * 0.3522 – 1000000 * 0.2090 – 1000000 * 0.1240 = 12 657 075 TL

PWCost-ALT3 = 145000000 + 1000000 (P/A, 11%, 20)

PWCost-ALT3 = 145000000 + 1000000 * 7.9633 = 152 963 300 TL

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PWCost-ALT0 < PWCost-ALT1 < PWCost-ALT2 < PWCost-ALT3
⇒ Current Best: ALT0 & Challenger: ALT1
BPWALT1−PWALT0 −25574000 + 76722000
= = 1.137 > 1 ⇒ Current best is eliminated
CPWALT1−PWALT0 45000000 − 0

⇒ New Current Best: ALT1 & New Challenger: ALT2

BPWALT2−PWALT1 7542275 + 25574000
= = 0.526 < 1 ⇒ Challanger is eliminated
CPWALT2−PWALT1 107963300 − 45000000

⇒ Current Best: ALT1 & New Challenger: ALT3

BPWALT3−PWALT1 12657075 + 25574000
= = 0.354 < 1 ⇒ Challanger is eliminated
CPWALT3−PWALT1 152963300 − 45000000

⇒ Select Alternative 1 (Deepen the river channel)

Q10. An existing airport with a capacity of 50 000 000 passengers per year can be used for 20
more years if a major repair that will cost 325 000 000 TL is realized. The maintenance and
operating cost after the repair will be 10 000 000 TL for the first year, which increases by
1 000 000 TL annually. The yearly income of the airport is estimated to be 1 TL per passenger
for the first 10 years and 0.5 TL per passenger for the last 10 years. After the repair, the airport
will contribute the public with a tourism income of 10 000 000 TL for the first year, but this
number is estimated to decrease by 200 000 TL annually. Another alternative is to construct a
new airport having a capacity 100 000 000 passengers per year at a cost of 1 425 000 000 TL.
The yearly maintenance and operating cost of the new airport that has a service life of 30 years
will be 15 000 000 TL. The yearly income of the new airport is estimated to be 1.5 TL per
passenger for the first 10 years, 1 TL per passenger for the next 10 years, and 0.5 TL per
passenger for the last 10 years. The tourism income provided by the new airport is expected to
be 12 500 000 TL per year throughout the service life. However, environmental impacts such
as cutting of trees and damaging the migration routes of birds result in a yearly disbenefit of
3 500 000 TL. By carrying out an incremental benefit-cost analysis with the present worth
approach, determine whether the new airport should be constructed or not. The interest rate is
given as 7% per year.

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Solution:

Common multiple of lives = 60 years

For Existing Airport:

Yearly income for the first 10 years = 1 x 50000000 = 50 000 000 TL

Yearly income for the last 10 years = 0.5 x 50000000 = 25 000 000 TL

10 000 000 TL
G = 200 000 TL
(Benefit)

0 10
20 Existing Airport

10 000 000 TL
G = 1 000 000 TL
(Cost)

A = 50 000 000 TL (Income) A = 25 000 000 TL (Income)

325 000 000 TL

(Cost)

AEBenefit-EA = [10000000 – 200000 (A/G, 7%, 20)]

AEBenefit-EA = [10000000 – 200000 * 7.3163] = 8 536 740 TL
PWBenefit-EA = 8536740 (P/A, 7%, 60) = 8536740 * 14.0392 = 119 849 000.21 TL

AECost-EA = 325000000 (A/P, 7%, 20) + [10000000 + 1000000 (A/G, 7%, 20)] –
50000000 (P/A, 7%, 10) (A/P, 7%, 20) – 25000000 (F/A, 7%, 10) (A/F, 7%, 20)
AECost-EA = 325000000 * 0.0944 + [10000000 + 1000000 * 7.3163] –
50000000 * 7.0236 * 0.0944 – 25000000 * 13.8164 * 0.0244 = 6 419 404 TL
PWCost-EA = 6419404 (P/A, 7%, 60) = 6419404 * 14.0392 = 90 123 296.64 TL

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For New Airport:

Yearly income for the first 10 years = 1.5 x 100000000 = 150 000 000 TL
Yearly income for the next 10 years = 1.0 x 100000000 = 100 000 000 TL
Yearly income for the last 10 years = 0.5 x 100000000 = 50 000 000 TL

A = 3 500 000 TL (Disbenefit)

A = 12 500 000 TL (Benefit)

0 10 20
30 New Airport

A = 15 000 000 TL (Cost)

A = 150 000 000 TL A = 100 000 000 TL A = 50 000 000 TL

(Income) (Income) (Income)

1 425 000 000 TL

(Cost)

AEBenefit-NA = 12500000 – 3500000 = 9 000 000 TL

PWBenefit-NA = 9000000 (P/A, 7%, 60) = 9000000 * 14.0392 = 126 352 800 TL

AECost-NA = 1425000000 (A/P, 7%, 30) + 15000000 – 150000000 (P/A, 7%, 10) (A/P, 7%, 30)
– 100000000 (P/A, 7%, 10) (P/F, 7%, 10) (A/P, 7%, 30) – 50000000 (F/A, 7%, 10) (A/F, 7%, 30)
AECost-NA = 1425000000 * 0.0806 + 15000000 – 150000000 * 7.0236 * 0.0806
– 100000000 * 7.0236 * 0.5083 * 0.0806 – 50000000 * 13.8164 * 0.0106 = 8 842 011.21 TL
PWCost-NA = 8842011.21 (P/A, 7%, 60) = 8842011.21 * 14.0392 = 124 134 763.78 TL

PWCost-EA < PWCost-NA ⇒ Current Best: Existing Airport & Challenger: New Airport
BPWNA −PWEA 126352800 − 119849000.21
= = 0.191 < 1 ⇒ Challanger is eliminated
CPWNA−PWEA 124134763.78 − 90123296.64

⇒ Select Existing Airport (Repair it)

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