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9.1 (a) Public sector projects usually require large initial investments while many
private sector investments may be medium to small.
(b) Public sector projects usually have long lives (30-50 years) while private sector
projects are usually in the 2-25 year range.
(c) Public sector projects are usually funded from taxes, government bonds, or user
fees. Private sector projects are usually funded by stocks, corporate bonds, or
bank loans.
(d) Public sector projects use the term discount rate, not MARR. The discount rate
is usually in the 4 – 10% range, thus it is lower than most private sector MARR
values.
9.2 (a) Private (b) Private (c) Public (d) Public (e) Public
(f) Private
9.3 (a) Benefit (b) Cost (c) Cost (d) Disbenefit (e) Benefit (f) Disbenefit
9.5 (a) Amount of financing for construction is too low, and usage rate is too low to
cover cost of operation and agreed-to profit.
(b) Special government-guaranteed loans and subsidies may be arranged at original
contract time in case these types of financial problems arise later.
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9.7 (a) Use Excel and assume an infinite life. Calculate the capitalized costs for all
annual amount estimates.
Chapter 9 2
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9.8 1.0 = (12)(value of a life)_
(200)(90,000,000)
Substitute B = (0.01x)(y)
(0.01x)(y) = 750x
y = $75,000 per year
Chapter 9 3
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9.10 All parts are solved on the spreadsheet once it is formatted using cell references.
Note in part (b) how much larger ($150,000) than the median income ($30,000)
the required benefit becomes as fewer households are affected
Chapter 9 4
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9.12 Cost = 150,000(A/P,3%,20) + 12,000
= 150,000(0.06722) + 12,000
= $22,083 per year
Benefits = 24,000(2)(0.50)
= $24,000 per year
9.13 (a) By-hand solution: First, set up AW value relation of the initial cost, P
capitalized a 7%. Then determine P for B/C = 1.3.
1.3 = 600,000____
P(0.07) + 300,000
Chapter 9 5
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9.14 Same spreadsheet, except change the discount rate and equations for AW and B/C.
The B/C value is the same at 1.3, so the project is still justified.
PW disbenefits = 45,000(P/A,6%,15)
= 45,000(9.7122)
= $437,049
PW M&O Cost = 300,000(P/A,6%,15)
= 300,000(9.7122)
= $2,913,660
B/C = 3,800,000 – 437,049__
2,200,000 + 2,913,660
= 3,362,951/5,113,660
= 0.66
Chapter 9 6
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9.17 (a) AW of Cost = 30,000,000(0.08) + 100,000
= $2,500,000 per year
B/C = (2,800,000)/(100,000+30,000,000*(0.08))
B/C = 1.12
Chapter 9 7
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9.19 Calculate the AW of initial cost, then the 3 B/C measures of worth. The roadway
should not be built.
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9.21 (a) Determine the AW of the initial cost, annual cost and recurring dredging cost,
then calculate (B – D)/C.
The disbenefit of $15,000 per year and the dredging cost each third year have
reduced the B/C ratio to below 1.0; the canals should not be extended now.
As above, the disbenefit of $15,000 per year and the dredging cost each third
year have reduced the B/C ratio to below 1.0; the canals should not be
extended now.
Chapter 9 9
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9.22 Alternative B has a larger total annual cost; it must be incrementally justified. Use
PW values. Benefit is the difference in damage costs. For B incrementally over A:
Select alternative B.
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9.25 East coast site has the larger total cost (J17). Set up the spreadsheet to calculate
AW values in $1 million. First, perform B/C on west coast site since do-nothing is
an option. It is justified. Then use incremental values to evaluate East versus
West. It is also justified since Δ(B/C) = 2.05. Select east coast site.
Cost/household/mo = $60(A/P,0.5%,60)
= 60(0.01933)
= $1.16
B/C1 = 1.25/1.16
= 1.08 Eliminate DN
Δbenefits = 8 – 1.25
= $6.75
Chapter 9 11
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Incr B/C2 = 6.75/8.51
= 0.79 Eliminate program 2
9.27 Using the capital recovery costs, solar is the more costly alternative.
Location W
AW = C = 7,000,000 (0.12) + 65,000 - 25,000
= $880,000
Chapter 9 12
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9.28 (cont) Δbenefits of W = 700,000 – 500,000
= $200,000
(b) Location E
B = 500,000 – 30,000 – 50,000 = $420,000
C = 3,000,000 (0.12) = $360,000
Modified B/C = 420,000/360,000 = 1.17
Location E is justified.
Location W
ΔB = $200,000
ΔD = $10,000
ΔC = (7 million – 3 million)(0.12)
= $480,000
ΔM&O = (65,000 – 25,000) – 50,000
= $-10,000
Note that M&O is now an incremental cost advantage for W.
9.29 Set up the spreadsheet to find AW of costs, perform the initial B/C analyses using
cell reference format. Changes from part to part needed should be the estimates
and possibly a switching of which options are incrementally justified. All 3
analyses are done on a rolling spreadsheet shown below.
(a) Bob: Compare 1 vs DN, then 2 vs 1. Select option 1.
(b) Judy: Compare 1 vs DN, then 2 vs 1. Select option 2.
(c) Chen: Compare 2 vs DN, then 1 vs 2. Select option 2 without doing the ΔB/C
analysis, since benefits minus disbenefits for 1 are less, but this option has a
larger AW of costs than option 2.
Chapter 9 13
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9.29 (cont)
9.30 Find the AW of costs for each technique, order them, and determine the Incr B/C
values.
Chapter 9 14
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9.30 (cont)
Technique AW of cost calculation__
1 15,000(A/P,15%,10) + 10,000
= 15,000(0.19925) + 10,000
= $12,989
2 19,000(A/P,15%,10) + 12,000
= 19,000(0.19925) + 12,000
= $15,786
3 25,000(A/P,15%,10) + 9,000
= 25,000(0.19925) + 9,000
= $13,981
4 33,000(A/P,15%,10) + 11,000
= 33,000(0.19925) + 11,000
= $17,575
B/C = 15,000/12,989
= 1.15 > 1.0 Eliminate DN, keep technique 1.
Technique 3 vs 1
C = 13,981 – 12,989 = $992
B = 19,000 – 15,000 = $4,000
B/C = 4,000/992
= 4.03 > 1 Eliminate technique 1, keep 3.
Technique 2 vs 3
C = 15,786 - 13,981 = $1,805
B = 20,000 – 19,000 = $1,000
B/C = 1,000/1,805
= 0.55 < 1.0 Eliminate technique 2, keep 3.
Technique 4 vs 3
C = 17,575 - 13,981 = $3,594
B = 22,000 -19,000 = $3,000
B/C = 3,000/3,594
= 0.83 < 1.0 Eliminate technique 4, keep 3
Replace the current method with technique 3.
Chapter 9 15
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9.31 Determine the AW of costs for each technique and calculate overall B/C. Select
all four since all have B/C > 1.0. AW of costs = E$5 - PMT(15%,10,E$4)
1 A B C D E
2 Technique 1 2 3 4
3
4 Installed cost 15,000 19,000 25,000 33,000
5 AOC 10,000 12,000 9,000 11,000
6 AW of costs $12,989 $ 15,786 $ 13,981 $ 17,575
7
8 Benefits 15,000 20,000 19,000 22,000
9
10 B/C 1.15 1.27 1.36 1.25
11
12 Select? Yes Yes Yes Yes
9.32 Combine the investment and installation costs, difference in usage fees define
benefits. Use the procedure in Section 9.3 to solve. Benefits are the incremental
amounts for lowered costs of annual usage for each larger size pipe.
150 vs 130 mm
C = (11,310 – 9,780)(A/P,8%,15)
= 1,530(0.11683)
= $178.75
B = 6,000 – 5,800
= $200
B/C = 200/178.75
= 1.12 > 1.0 Eliminate 130 mm size.
200 vs 150 mm
C = (14,580 – 11,310)(A/P,8%,15)
= 3270(0.11683)
= $382.03
B = 5800 – 5200
= $600
Chapter 9 16
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B/C = 600/382.03
= 1.57 > 1.0 Eliminate 150 mm size.
230 vs 200 mm
C = (17,350 – 14,580)(A/P,8%,15)
= 2770(0.11683)
= $323.62
B = 5200 – 4900
= $300
B/C = 0.93 < 1.0 Eliminate 230 mm size.
A vs DN
AW of Cost = 50(A/P,10%,5) + 3
= 50(0.26380) + 3
= 16.19
AW of Benefits = 20 – 0.5
= 19.5
B/C = 19.5
16.19
= 1.20 > 1.0 Eliminate DN.
B vs A
C = (90 – 50)(A/P,10%,5) + (4 – 3)
= 40(0.26380) + 1
= $11.552
C vs A
C = (200 – 50)(A/P,10%,5) + (6 – 3)
= 150(0.26380) + 3
= 42.57
B/C = 39.4/42.57
= 0.93 < 1.0 Eliminate C
Select site A
Chapter 9 17
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9.34 (a) Calculate the B/C of each proposal for initial screening (row 6). Four
locations are retained – F, D, E and G. No need to compare F vs DN since
one site must be selected. Site D is the one selected.
(b) For independent projects, use the B/C values in row 6 of the Excel solution
above and select the largest three of the four with B/C > 1.0. Those selected
for are: D, F, and E.
9.35 (a) An incremental B/C analysis is necessary between Y and Z, if these are
mutually exclusive alternatives.
9.36 J vs DN
B/C = 1.10 > 1.0 Eliminate DN.
K vs J
B/C = 0.40 < 1.0 Eliminate K.
Chapter 9 18
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L vs J
B/C = 1.42 > 1.0 Eliminate J.
M to L
B/C = 0.08 < 1.0 Eliminate M.
Select alternative L.
Note: K and M can be eliminated initially because they have B/C < 1.0.
9.37 (a) Projects are listed by increasing PW of cost values. First find benefits for each
alternative and then find incremental B/C ratios:
Benefits for P
1.1 = BP /10
BP = 11
Benefits for Q
2.4 = BQ/40
BQ = 96
Benefits for R
1.4 = BR/50
BR = 70
Benefits for S
1.5 = BS/80
BS = 120
Chapter 9 19
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Incremental B/C for R vs Q
B/C = 70 – 96
50 – 40
= -2.60
Disregard due to less B for more C.
FE Review Solutions
9.42 Project B/C values are given. Incremental analysis is necessary to select one
alternative. Answer is (d)
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Extended Exercise solution
1. The spreadsheet shows the incremental B/C analysis. The truck should be
purchased. The annual worth values for each alternative are determined using the
equations:
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2. The annual fee paid for 5 years now would have to be negative (cell D5) in that
Brewster would have to pay Medford a ‘retainer fee’, so to speak, to possibly use the
ladder truck. This is an economically unreasonable approach.
Excel SOLVER is used to find the breakeven value of the initial cost when B/C = 1.0
(cell F21).
Chapter 9 22
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3. The building cost of over $2.2 million could be supported by the Brewster proposal
(in cell F7), again found by using SOLVER. This is also not an economically
reasonable alternative.
Chapter 9 23
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4. The estimated sum of premium and property loss would need to be $523,714 or less
(cell F17, SOLVER). This is not much of a reduction from the current estimate of
$600,000.
Chapter 9 24
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Case Study Solution
If the accident reduction rate is assumed to be the same as that for closer spacing of
lights,
B/C = 1,111,500/727,850
= 1.53
B/C = 1,111,500/1,144,941
= 0.97
Chapter 9 25
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5. For lights to be justified, benefits would have to be at least $1,456,030 (instead of
$1,111,500). Therefore, the difference in the number of accidents would have to be:
1,456,030 = (difference)(4500)
Difference = 324
Chapter 9 26
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