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EGB387 Lecture W10 - Benefit Cost Analysis - Coggle Diagram
EGB387 Lecture W10 - Benefit Cost Analysis
Differences: Public vs. Private Projects
Public
Size of investment
Life
Annual cash flow
Funding
Interest rate
Selection criteria
Environment of the evaluation
Private
Environment of evaluation
Interest rate
Annual cash flow
Size of investment
Life
Types of Contracts
Traditional: Contractor
does not share
project risk
Fixed price - lump sum payment
Cost reimbursable - Cost plus, as negotiated
Public-private partnerships (PPP)
Design-build projects - contractor responsible from design to operations stage
Design-build-finance-maintain-operate (DBFMO) projects
Turnkey project with contractor managing finances (managing cash flow); government obtains funding for project
B/C Analysis of a Single Project
Conventional B/C ratio
B/C = (B-D)/C
Modified B/C ratio
B/C = (B-D- M&O costs)/initial investment
Decision guideline
If B/C >= 1.0, project is economically justified
If B/C < 1.0, project is not acceptable
Terminology
Costs (C) - estimated expenses to government unit
Benefits (B) - estimates advantages to be experienced by the public (pwners)
Disbenefits (D) - estimated undesirable consequences to public (may be indirect economic disadvantages)
Discount rate (i) - term used instead of interest rate
B/C = PW of benefits/PW of costs = AW of benefits/AW of costs = FW of benefits/FW of costs
Profitability Index (PI) - used for private sector
PI = PW of NCF series/PW of initial investment
Decision guideline
PI < 1.0 project is not economically acceptable
PI >=1.0 - project is economically justified at discount rate
Incremental B/C Analysis: Two ME Alternatives
Procedure for Two Alternatives - X and Y
Order alternatives by
equivalent total cost
(Assume X has a lower AW of cost)
Revenue alternatives - benefit value given directly