MS-291: Engineering Economy

(3 Credit Hours)

Chapter 9
Benefit/Cost
Analysis
Engineering Economy

Background
So for we applied evaluation methods PW, AW, FW or IROR
to private sector alternatives, mostly
This chapter is about public sector and service sector
alternatives and their economic consideration
What is the difference between the two (Private
alternatives versus Public sector alternatives)?
In public projects, the owners and users (beneficiaries) are
the citizens and residents of a government unitcity,
county, state, province, or nation
Government units provide the mechanisms to raise capital
and operating funds

Background
Public-private partnerships have become increasingly
common, especially for large infrastructure projects
such as major highways, power generation plants,
water resource developments etc.
The benefit/cost (B/C) ratio introduces objectivity into
the economic analysis of public sector evaluation, thus
reducing the effects of politics and special interests
Performed correctly, the benefit/cost method will
always select the same alternative as PW, AW, and ROR
analyses

Content of the Chapter

1. Difference between Public & Private sector projects
2. PPP Projects
3. Calculate B/C ratio for a single project
4. Select better of two alternatives using B/C method
5. Select best of multiple alternatives using B/C method
6. Use cost-effectiveness analysis (CEA) to evaluate Service
sector projects
7. Describe how ethical compromises may enter public sector
projects

Public Sector Projects

A public sector project is a
product, service, or system
used, financed, and owned
by the citizens(the owner) of
any government level ( local, provincial, national)
The primary purpose of these projects is to
provide service to the citizens for the public
good at no profit
A good that is non-excludable and non-rival in consumption is called
public goodreverse of it is Private Good

Types of Public Sector

Projects
Hospitals
Parks and recreation facilities
Highways, Dams, Bridges
Courts, schools, prisons
Public Housing
Police and fire protection
Many other types

Differences: Public vs. Private

Projects: Size of Investment
Public Sector

Private Sector

Large
Alternatives developed to serve
public needs require large
initial investments, possibly
distributed over several years.

Small, medium, large

For private sector it all depends
upon factors such as expected
profit, security of investment,
type of project, etc.

Modern highways, public

transportation systems,
universities etc., need huge
investments

Private Sector projects mainly

are small to medium range
investments
Large investment private
projects may also occur

Differences: Public vs. Private

Projects: Life estimates
Public Sector
Longer (3050 years)
Long life for public sector Projects implies. the use of Capitalized
Cost methods, where infinity is used for n and annual costs are
calculated as A = P ( i )
As n gets larger, especially over 30 years, the differences in calculated
A values become small.
E.g., at i 7%, there will be a very small difference in 30 and 50 years,
because ( A/P ,7%,30) 0.08059 and ( A/P ,7%,50) 0.07246

Private Sector
Shorter (225 years)

Differences: Public vs. Private

Projects: Annual Cash Flow
Public Sector
No profit but costs, benefits, and disbenefits are estimated
Costsconstruction, operation, & maintenance. bear by unit of
government
Benefitsare for the citizens
Disbenefits are expected undesirable or negative consequences
to the owners if the alternative is implemented
It is difficult to calculate the exact costs, benefits and disbenefits of
public sector projects

Private Sector

Revenues contribute to profits; costs are estimated

Differences: Public vs. Private

Projects: Funding
Public Sector

Private Sector

Taxes, fees, bonds, private funds

Taxes are collected from those
who are the owners of public
projectsthe citizens

Stocks, bonds, loans, individual

owners

Bonds are often issued: e.g.

Pakistan Investment Bond (PIB)
Treasury Bills and Sukuk

Stocks refers to shares of

various companies raising
funds via shares

Private lenders can provide upfront financing. Also, private

donors may provide funding for
museums, memorials, parks,
and garden areas through gifts.

Differences: Public vs. Private

Projects: Interest Rate
Public Sector
Lower
Classified as low-interest in
range of 4-8% normally
because government agencies
are exempt from taxes levied
by higher-level units
The public sector interest rate
is identified as i but is refer as
discount rate and social
discount rate to distinguish it
from private rate of return

Private Sector

Higher, based on cost of

capital
Private corporations and
individual citizens do pay
taxes
Interest rate for private sector
is higher compare to public
sector

Differences: Public vs. Private

Projects: Alternative selection
criteria
Public Sector

Private Sector

Multiple criteria
Economic +
noneconomic interests+
special-interest+political
and citizen groups
Seldom use only PW, AW
or other economic
criteria sole reason for
selection

Primarily based on rate of

return
Private sector project
selection criteria mainly
depend upon economic
criteria using ROR such
as PW, AW etc

Differences: Public vs. Private

Projects: Environment of Evaluation
Public Sector

Private Sector

Politically inclined

Primarily economic

Public meetings, debates

Pressure of votes,
environmentalists,
developers etc.,
Selection process is not as
clean as in private sector
evaluation

The major motive is

profit and the selection
criteria is economic
normally not based on
political well.

Differences: Public vs. Private Projects:

Summary
Characteristic

Public

Size of Investment

Large

Life

Longer (30 50+ years)

Annual CF

No profit

Funding

Private
Small, medium, large
Shorter (2 25 years)
Profit-driven

Taxes, fees, bonds, etc. Stocks, bonds, loans, etc.

Interest rate
Selection criteria

Lower

Higher

Multiple criteria

Primarily ROR

Environment of evaluation Politically inclined

Economic

Public Private Partnership

Milton Friedman (1912-2006)

Quotes.Nobel Laureate 1976 for Economics
If you put the federal government in charge of the
Sahara Desert, in 5 years there'd be a shortage of
sand
The government solution to a problem is usually
as bad as the problem
Governments never learn. Only people learn
What takes the government 50 years to achieve
can be done by the private sector in a tenth of the
time.

PPP: Public Private

Partnership
Public-private partnerships refer to the private sector
financing, designing, building, maintaining and
operating infrastructure assets traditionally provided by
the public sector.
Success stories globally in following sectors:
Transportation
Water/Wastewater
Urban Development
Energy

How PPP Works ?...

A Simple Example
Highway example usual arrangements
Government borrows money or Tax Public, pays to get
a Highway built, Public uses the facility for free but pay
in form of Increased Tax
PPP
Private firm borrows money, builds Highway, Public pay
fee to use the highway, Firm hands over the property to
Govt. after say 20 years ..BOT model

Models of Public Private

Partnerships
The most common models of PPPs are:
Service contract . Provision of services only
Management contract:operations and
maintenance of the facility under contract.
Lease: operates and maintains the asset in
accordance with the terms of the lease.
Build-Operate-Maintain (DBOM)
Build-Own-Operate-Transfer (BOOT)
Build-Own-Operate (BOO)
literature suggests that there is no unique model of
PPP. Each project, given its circumstances, will define
what is suitable and what is required

10

PPPwhy?
Aging infrastructure .. need to be repaired/upgraded
Shrinking Govt. budget .. Pressure for balance
budget and less expenditures
Constituent demands. Roads, motorways every
where

Why PPP becoming so popular ?

Public Sector Strengths

Private Sector Strengths

Legal Authority
Broad prospective/balance
the competing goals to
meet public needs
Capital resources

Management Efficiency
Newer Technologies
Workplace Efficiencies
Cash Flow Management
Personnel Development

Successful Partnerships
The Secret is to Balance the Strengths of Both Sectors
The Experience Of One Sector Helps Another

11

Advantages of PPPs

Maximizes the use of each sectors strength

Reduced development risk
Reduced public capital investment
Mobilizes excess or underutilized assets
Improved efficiencies/quicker completion
Better environmental compliance
Improved service to the community
Improved cost effectiveness
Shared resources
Shared/allocated risks
Mutual rewards

12

Pakistan: National Highways Authority PPP

based projects . under implementation

Source: NHA.GOV.PK

BENEFIT COST RATIOS FOR A

SINGLE PROJECT

13

Benefit-Cost Ratio: Origin

Its is the fundamental evaluation technique for
public sector projects
The Flood Control Act of 1936 of USA requires
that benefits must exceed costs to justify federally
funded projects.this became a criterion now
used in most public projects
There can be difficulty defining benefits,
disbenefits and even in establishing costs

Benefit/Cost Analysis for a

Single Project
There are several versions of Benefit-Cost
Analysis or B/C ratiohowever the
fundamental approach is the same
All the costs, benefits and disbenefits
need to be converted to a common
monetary units such as, PW, AW or FW at
the discount rate
However, PW and AW is preferred on FW

14

Benefit/Cost Analysis for a Single

Project
Must identify each cash flow as either benefit, disbenefit, or
cost
Benefit (B) -- Advantages to the public
Disbenefit (D) -- Disadvantages to the public
Cost (C) -- Expenditures by the government
Note: Savings to government are subtracted from costs
Conventional B/C ratio =

[PW Benefits PW Disbeneifts ]

PW(Costs)

Care must be taken while identifying costs and

disbenefits because if treated wrongly, the result will
highly affected.

From B/C Ratio to Modified

B/C ratio
If disbenefits are treated as costs .the B/C
ratio will change considerably ..care must be
taken to classifying Costs and Disbenefits
Modified B/C ratio overcome this problemby
using all Benefits, Disbenefits, and Annual O&
M Costs in numerator and Initial investments
in denominator
Modified
B/C ratio =

[PW Benefits PW Disbeneifts PW(O&M Costs)]

Initial Investment

15

Profitability Index/Present
Worth Index
Profitability Index shows the financial attractiveness of the
proposed project
It is same as Modified B/C ratio except that disbenefits are
ignored in calculation of Profitability Index
PW(NCF) =
Profitability Index =

PW
Initial Investment

PW(Benefits)
PW(Costs)

It is used for the B/C ratio of private sector projects mostly,

where disbenefits are normally ignored
For public sector however, disbenefits should be included in
numerator thus Profitability index become similar to
modified B/C ratio

Practice: Identifying

Benefits, Disbenefits, Costs

Identify the following cash flows as a benefit, disbenefit, or cost.

a) Loss of income to local businesses because of a new freeway Disbenefit

b) Less travel time because of a loop bypass

Benefit

c) $400,000 annual income to local businesses because of tourism created by a

national park Benefit
d) Cost of fish from a hatchery to stock a lake at the state park

Cost

e) Less tire wear because of smoother road surfaces Benefit

f) Decrease in property values due to the closure of a government research lab
Disbenefit
g) School overcrowding because of a military base expansion Disbenefit
h) Revenue to local motels because of an extended weekend holiday Benefit

16

BENEFIT COST RATIOS FOR A

SINGLE PROJECT

B/C Analysis Single Project

Make sure you use common measuring unitPW, AW or FW for all B, C, D

B-D
C*

Conventional B/C ratio =

Modified B/C ratio =

B D M&O
Initial Investment*

PW (NCF)**
Profitability Index =

initial investment

** PW(NFC) = PW(B)- PW(C)

If value 1.0,
accept project;
otherwise, reject
Denominator is
initial investment
by the way why
Check I did not write
PW of Initial
Investment ?

*If there is a Salvage Value in a projectit is subtracted from Costs/Initial

Investments given in Denominator of the B/C Ratio formula.

17

Very Important!!!!
If in a problem you are asked to evaluate a
project based on Benefit-Cost Ratioit will always
refers to Conventional Benefit-Cost Ratio
So default B/C ratio method is Conventional B/C
ratio method
When need will be required for modified B/C
ratio or Profitability index it will be clearly
stated to you to do so

Benefit/Cost Analysis for a

Single Project
All terms of B/C relationship must be expressed in
same units, i.e., PW, AW, or FW
The sign convention for B/C analysis is positive
signs, so costs are preceded by a + sign
Salvage values, when they are estimated, are
subtracted from costs

18

Decision Guidelines for B/C & PI

Benefit/cost analysis

If B/C 1.0, project is economically justified at

discount rate applied
If B/C < 1.0, project is not economically
acceptable
Profitability index analysis of revenue projects

If PI 1.0, project is economically justified at

discount rate applied
If PI < 1.0, project is not economically acceptable

Example: B/C Analysis Single

Project
A flood control project will have a first cost of $1.4 million with an annual
maintenance cost of $40,000 and a 10 year life. Reduced flood damage is
expected to amount to $175,000 per year. Lost income to farmers is estimated
to be $25,000 per year. At an interest rate of 6% per year, should the
project be undertaken based on Benefit-Cost criteria ?

Which one should we use , PW, AW, FW ?

Solution: Express all values in AW terms and find B/C ratio
Benefits: B = $175,000
Disbenefits: D = $25,000
Costs: C = 1,400,000(A/P,6%,10) + $40,000 = $230,218
Benefit/Costs:
B/C = (175,000 25,000)/230,218
= 0.65 < 1.0

Do not build project

19

Class Practice: 5 Minutes

Calculate the B/C ratio for the following cash flow
estimates at a discount rate of 7% per year.
Item

Cash Flow

FW of benefits, $

30,800,000

AW of dibenefits, $ per year

105, 000

First Cost, $

1,200,000

M&O Costs, $ per year

400,000

Life of project, years

/ =

( + )

20

/ =

( + )
( + )

/ =

( + )

Solution

D
C

B/C

= 30,800,000(A/F, 7%, 20)

= 30,800,000(0.02439)
= $751,212
= $105,000
= 1,200,000(A/P,7%,20) + 400,000
= 1,200,000(0.09439) + 400,000
= $513,268
= (751,212 105,000)/513,268
= 1.26

20

ONE MORE EXAMPLE

Question: 9.24: B/C ratio

single alternative
For the data shown, calculate the conventional
B/C ratio at i 6% per year.
Benefits: $20,000 in year 0 & $30,000 in year 5
Disbenefits: $7000 in year 3
Savings (to government): $25,000 in years 14
Cost: $100,000 in year 0
Project life: 5 years
/ =

( + )

/ =

( + )
( + )

/ =

( + )

21

Question: 9.24
For the data shown, calculate the conventional B/C ratio at i 6% per year.
Benefits: $20,000 in year 0 & $30,000 in year 5, Disbenefits: $7000 in year 3
Savings (to government): $25,000 in years 14, Cost: $100,000 in year 0
Project life: 5 years
Though B/C Ratio can be calculated using AW, PW or FWits easy to use PW here

Benefits:=20,000 + 30,000(P/F, 6%, 5)

= 20,000 + 30,000(0.7473)
= $42,419
Disbenefits:= 7,000(P/F, 6%, 3)
= 7000(0.8396)
= $5,877
25,000 (P/A, 6%, 4)
Savings (to
govt):=
= 25,000(3.4651)
= $86,628

Costs:= $100,000
C. B/C Ratio = PW(B) PW(D)
PW(C) PW(Sgov)
= 42,419 5877
100,000 86,628
2.73

Benefit-Cost Ratio for Two

Alternatives
The benefit-Cost Ratio technique for comparing
two alternatives is same as that of IROR for two
alternatives
The incremental B/C ratio is determined using
PW, AW, or FW calculations
Decision Rule

if B/C 1.0 select the higher-cost alternative

If B/C <1.0, choose the lower-cost alternative

22

Incremental Analysis for

B/C Ratio
For incremental B/C Analysis each alternative
should be viable based on B/C ratio
Two differences between incremental B/C
analysis and Incremental ROR analysis
1. all costs have a positive sign in the B/C
2. ordering of alternatives by increasing
equivalent total costs, that is, PW or AW of all
cost estimates that will be utilized in the
denominator of the B/C ratio. When not done

correctly, the incremental B/C analysis may reject a justified highercost alternative

Comparison of two alternatives

based on B/C ratio
B/C = Incremental B Incremental D
Incremental Costs
Where:
Incremental B = Benefits of B Benefits of A
Incremental D = Disbenefits of B Disbenefits of A
Incremental C = Total Cost of B Total Cost of A
Note 1: Where B is the higher total costs alternative and A lower cost alternative
Note 2: Make sure you use PW or AW for all Benefits, Disbenefits and Costs

23

Alternative Selection Using

Incremental B/C Analysis Two ME
Alternatives
(1)
(2)
(3)
(4)
(5)
(6)

Determine equivalent total cost for each alternative

Order alternatives by increasing total cost
Identify B and D for each alternative, if given, or go to step 5
Calculate B/C for each alternative and eliminate all with B/C < 1.0
Determine incremental costs and benefits for first two alternatives
Calculate B/C; if >1.0, higher cost alternative is viable
If B/C; if <1.0, select lower cost alternative

B/C Analysis of Independent Projects

Independent projects comparison does not
require incremental analysis
Compare each alternatives overall B/C with DN
option
+ No budget limit: Accept all alternatives with B/C
1.0
+ Budget limit specified: capital budgeting problem;
selection follows different procedure (will be
discussed later in chapter 12)

24

Class Practice: 5 minutes Time

The estimates shown are for a bridge under consideration for a
river. Use the B/C ratio method at an interest rate of 6% per year
to determine which bridge, if either, should be built based on
B/C ratio.
Item

East Location

Initial Cost, $
Annual M&O, $/year
Benefits, $/year
Disbenefits, $/year
Life of project, years
/

( + )

West Location

11 x 106
100000
990000
120000

/ =

( + )
( + )

27 x 106
90000
2400000
100000

/ =

( + )

Example: B/C ratio for two

alternatives
Prerequisite alternative must be viable based on B/C Ratio
East Location:
Benefits = $ 990,000 per year
Disbenefits = $ 120,000 per year
Costs = 11 x 106 (0.06) + 100,000
= $760,000 per year
B/CREast = AW(B) AW(D) = 990,000 120,000 = 1.14
760,000
AW(C)
1- Determine total costs
- total costs here are.initial costs + M&O costs
2- Arrange alternatives by increasing total costs DN, East, West
East vs. DN:
Since East is economically viable based on BCR (1.14 > 1) Eliminate DN

25

Example: B/C ratio for two

alternatives
West vs. East:
B/CRWest East

B/C= Incremental B Incremental D

Incremental (C)
=

1,430,000
950,000

= 1.51

AW(B-D)= AW(BWest Dwest) AW(BEast DEast) = (2,400,000 100,000) (990,000 120,000)

= $1,430,000
AW(C)= [27,000,000(0.06) + 90,000] 760,000 = $950,000
Since 1.51 > 1 indicating that extra investment in West Location is economically viable
based on B/C ratio.so one should select alternative West Location.
If it would have been less than 1 ..we would have selected East location and the cost saved
from cheaper alternative selection would have been invested some where else at MAAR

Question 9.32
Select the better proposal using B/C analysis
and an interest rate of 8% per year.

26

Question 9.32

CP1 = 900,000(A/P,8%,10) + 120,000

= 900,000(0.14903) + 120,000
= $ 254,127 per year

Check viability of Proposal 1 to start with

BP1 = $530,000 per year
DP1 = $ 300,000 per year

B/CP1 = (530,000 300,000)/254,127

= 0.91
Proposal one is not viable

Question 9.32

Check viability of Proposal 2

BP2 = $650,000 per year
DP2 = $195,000 per year

CP2 = 1, 700,000(A/P,8%, 20) + 60,000

= 900,000(0.10185) + 60,000
= $ 233,145 per year

B/CP1 = (650,000 195,000)/233,145

= 1.95
Proposal 2 is economically viable

27

Benefit-Cost Ratio for Multiple

Alternatives
The procedure of comparing more than two
alternatives based on BCR is similar to that of
comparison of several alternatives based on ROR
Comparison is based on pairwise comparison
The process starts with comparing DN (Donothing) with the lowest cost alternatives

Defender, Challenger and Do

Nothing Alternatives
There is a:
Defender in-place system or currently selected alternative
Challenger Alternative challenging the defender
Do-nothing option Status quo system
General approach for incremental B/C analysis for multiple ME alternatives:
Lower total cost alternative is first compared to Do-nothing (DN)
If B/C for the lower cost alternative is < 1.0, the DN option is compared to B/C
of the higher-cost alternative
If B/C for lower cost alternative is > 1.0, the DN option is eliminated, and the
lower cost alternative is compared with next higher cost alternative
Incrementally,
this process is continued until it leads to one alternative selection finally, and
that alternative is the required alternative

28

Alternative Selection Using Incremental

B/C Analysis Two or More ME
Alternatives
Procedure similar to ROR analysis for multiple alternatives
(1)
(2)
(3)
(4)
(5)
(6)
(7)

Determine equivalent total cost for each alternative

Order alternatives by increasing total cost
Identify B and D for each alternative, if given, or go to step 5
Calculate B/C for each alternative and eliminate all with B/C < 1.0
Determine incremental costs and benefits for first two alternatives
Calculate B/C; if >1.0, higher cost alternative becomes defender
Repeat steps 5 and 6 until only one alternative remains

Multiple Alternatives Evaluation:

Using B/C Ratio
Example 9.6: Selecting a City for constructing a Park.

29

Practice: Evaluation of Multiple

Alternatives using B/C Ratio
A group of engineers responsible for developing
advanced missile detection and tracking
technologies, such as shortwave infrared, thermal
infrared detection, target tracking radar, etc.,
recently came up with six proposals for
consideration. The present worth (in $ billions) of
the capital requirements and benefits is shown for
each alternative in the table. Determine which
one(s) should be undertaken, if they are:
(a) independent and (b) mutually exclusive.

Practice: Evaluation of Multiple

Alternatives using B/C Ratio

Determine which one(s) should be undertaken, if they are:

(a) independent and (b) mutually exclusive.

30

Practice: Evaluation of Multiple

Alternatives using B/C Ratio

BCRA = 70/80 =
BCRB = 55/50 =
BCRC = 76/72=
BCRD = 52/43 =
BCRE = 85/89 =
BCRF = 84/81 =

0.87
1.10
1.05
1.21
0.95
1.04

Given that B/C ratios of A

and E are lower than 1 they
are eliminated as it is not
economically viable based
on B/C ratio.

Select, B, C, D and F if
alternatives are
independent

Practice: Evaluation of Multiple

Alternatives using B/C Ratio
Arrange from lowest to highest costs

DN versus D

BCRD = 52/43 = 1.21

BCRB = 55/50 = 1.10
BCRC = 76/72= 1.05
BCRF = 84/81 = 1.04

BCR = 52/43

D versus F
BCR = (84-52)/(81-43)
= 0.84
Eliminate F

So Select D

= 1.21
Eliminate DN

D versus B
BCR = (55-52)/(50-43)
= 0.43
Eliminate B
D versus C
BCR = (76-52)/(72-43)
= 0.83
Eliminate C

31

 Clarification!!!!!!

Class Practice: 5 minutes Time

The estimates shown are for a bridge under consideration for a
river. Use the B/C ratio method at an interest rate of 6% per year
to determine which bridge, if either, should be built based on
B/C ratio.
Item

East Location

Initial Cost, $
Annual M&O, $/year
Benefits, $/year
Disbenefits, $/year
Life of project, years
/

( + )

West Location

106

11 x
100000
990000
120000

/ =

( + )
( + )

27 x 106
90000
2400000
100000

/ =

( + )

32

Example: B/C ratio for two

alternatives
Prerequisite alternative must be viable based on B/C Ratio
East Location:
Benefits = $ 990,000 per year
Disbenefits = $ 120,000 per year
Costs = 11 x 106 (0.06) + 100,000
= $760,000 per year
B/CREast = AW(B) AW(D) = 990,000 120,000 = 1.14
760,000
AW(C)
1- Determine total costs
- total costs here are.initial costs + M&O costs
2- Arrange alternatives by increasing total costs DN, East, West
East vs. DN:
Since East is economically viable based on BCR (1.14 > 1) Eliminate DN

West is also economically viable based on BCR (1.345 > 1)

So we can compare East and West location Incrementally

33

Example: B/C ratio for two

alternatives
West vs. East:
B/CRWest East

B/C= Incremental B Incremental D

Incremental (C)
=

1,430,000
950,000

= 1.51

AW(B-D)= AW(BWest Dwest) AW(BEast DEast) = (2,400,000 100,000) (990,000 120,000)

= $1,430,000
AW(C)= [27,000,000(0.06) + 90,000] 760,000 = $950,000
Since 1.51 > 1 indicating that extra investment in West Location is economically viable
based on B/C ratio.so one should select alternative West Location.
If it would have been less than 1 ..we would have selected East location and the cost saved
from cheaper alternative selection would have been invested some where else at MAAR

Very Important about

Incremental Analysis!!!!!
For Incremental Analysis (both B/C ratio and also for IROR)
first you have to confirm if the two alternatives is
individually viable base on (B/C ratio or IROR)
it means you have to calculate individual B/C ratio or
IROR for each alternative before applying Incremental
analysis
in IROR case, its a lengthy process to calculate IROR for
each alternative and then comparing it pairwise via
incremental., but do not worry, I would not ask you for
such things (calculating IROR many times in same problem).
But u have to learn the procedure and that how it
worksas I may ask things related to it

34

Today Lecture
Service Sector Projects & Cost Effective Analysis
Ethical Considerations

Lets move ahead.

I am going to skip both the last two topics of
this chapter .
I prepared the slides. But..
So lets move to new Topic.

35

Steps in an Engineering Economy

Study
Step 1 in
Study

Problem description
Objective statement

Step 2

Available data
Alternatives for solution

Step 3

Cash flows and other

estimates

Step 4

Measure of worth criterion

(PW, B/C, IRR etc)

Step 5

Engineering Economic
Analysis

Step 6

Best alternative Selection

Step 7

Implementation and
Monitoring

One or more approaches to

meet objectives

Expected life
Revenues
Costs
Taxes
Project Financing

Tools u will be learning in

this course are used here

Time Passes

Step 1 in
Study

New Problem description

New engineering economic

study begins

Comparing Various
Evaluation Criteria
What we learnt so for in five Chapters:

Chapter 5: Present Worth Analysis

Chapter 6: Annual Worth Analysis
Chapter 7: ROR Analysis for Single Alternative
Chapter 8: ROR Analysis for Multiple Alternatives
Chapter 9: Benefit Cost Analysis & Public Sector Economics

Any method can be used to Select an alternative

Only one method is required to use for Engineering Economy
study because any method performed correctly will select same
alternative

36

Comparing Various
Evaluation Criteria
The selection of correct method for evaluation and its
application may be confusing due to available
information about alternative
Which method should be selected ?
It may be provided by instructor (exam case)
Some time organization you are working for will ask for
specific criteria (Job, field)
Generally, the selection of particular criteria depends
upon the availability of time, data and ease of
applying the technique

Recommended evaluation
methods for different situations

Why not PW ?

37

Present Worth & Future Worth

Characteristics of an Economic Analysis of Mutually Exclusive Alternatives Once the
Evaluation Method is determined

Annual Worth

38

Rate of Return

Benefit/Cost Ratio

39

THANK YOU

40