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Module 8 Benefit Cost Ratio

The document discusses benefit-cost analysis for evaluating economic alternatives. It defines benefits, costs, and disbenefits and explains how to calculate the benefit-cost ratio for single projects using conventional and modified methods. It also provides an example of comparing two alternatives using incremental benefit-cost analysis and selecting the alternative with the highest incremental benefit-cost ratio.

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Rhonita Dea Andarini
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699 views13 pages

Module 8 Benefit Cost Ratio

The document discusses benefit-cost analysis for evaluating economic alternatives. It defines benefits, costs, and disbenefits and explains how to calculate the benefit-cost ratio for single projects using conventional and modified methods. It also provides an example of comparing two alternatives using incremental benefit-cost analysis and selecting the alternative with the highest incremental benefit-cost ratio.

Uploaded by

Rhonita Dea Andarini
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Module 8: Benefit-Cost Ratio

SI-4251 Ekonomi Teknik


Rani G. K. Pradoto
Outline Module 8
 Benefit – Cost Ratio

2 SI-4251 Ekonomi Teknik


The Benefit – Cost Analysis
 The most commonly used method for
comparing economic alternatives.
 This method is often considered as
“supplementary” to present worth
analysis.
 The objective is to determine whether the
benefit (gained) in return to any cost
(spent) is favorable.
 Basically it is desired that we will gain
more than we have spent.
 Benefit – Cost > 0  B/C > 1.0
3 SI-4251 Ekonomi Teknik
Classification
 Benefit (B)  all favorable return/gain
or advantages
 Disbenefit (D) negative benefit, any
negative (loss) result
 Cost (C)  all things that one
pays/expends in order to have return

 B e n e fit  in co m e fro m a n in ve stm e n t,
e . g ., in te re st
 D isb e n e fit  lo ss o f va lu e o r ( in itia l)
in co m e d u e to a n in ve stm e n t
 C o st  exp e n d itu re

4 SI-4251 Ekonomi Teknik
B/C Analysis for A Single Project
Conventional B/C


B−D
B/C =

C
Modified B/C

 - includes operation & maintenance cost


 - initial investment replaces cost as
denominator
B − D −O&M
B/C =
I
Calculation can be made in present worth, future worth
or annuity
5 SI-4251 Ekonomi Teknik
B - C Analysis for A Single Project
Conventional B-C


B − C = (B − D) − C

Modified B-C

 - includes operation & maintenance cost

B − C = (B − D − O & M ) − I

Calculation can be made in present worth, future worth


or annuity
6 SI-4251 Ekonomi Teknik
Exercise
A new machine having an initial investment of Rp 225 million and additional

Rp 35 million a year for maintenance and operation cost, is estimated to


generate Rp95 million per year in revenue. On the other hand, installation of
this new machine will cost the company to lose Rp3.2 million per year from
selling by product. The machine can latter be sold for Rp75 million at the end
of 5 year and the rate of return is set at 8%. Do the benefit cost analysis.
Conventional method :
Cost C1 = Rp 225 million  225 (A/P, 8, 5)
Cost C2 = Rp 35 million/year  = 56.3535
Benefit B1 = Rp 95 million/year  35 = 35
Benefit B2 = Rp 75 million at end of 595year  = 95
Disbenefit D = Rp 3.2 million/year 75(A/F, 8, 5)
= 12.7845
3 2 = 3.2
( A / P , 8 , 5 ) = 0 . 25046 (A /F , 8 , 5 ) =
0 .1 7 0 4 6
B / C = [( 95 + 12 . 7845 ) – 3 . 2 - 35 ]/( 56 . 3535 ) =
1 . 2348
B - C = [( 95 + 12 . 7845 ) – 3 . 2 - 35 ] –
[756 . 3535 ] = Rp 13 . 231SI-4251
million
Ekonomi TeknikMuhamad Abduh, Ph.D.
Exercise
A new machine having an initial investment of Rp 225 million and additional

Rp 35 million a year for maintenance and operation cost, is estimated to


generate Rp95 million per year in revenue. On the other hand, installation of
this new machine will cost the company to lose Rp3.2 million per year from
selling by product. The machine can latter be sold for Rp75 million at the end
of 5 year and the rate of return is set at 8%. Do the benefit cost analysis.
Modified method :
Cost C1 = Rp 725 million  225 (A/P, 8, 5)
Cost C2 = Rp 35 million/year  = 56.3535
Benefit B1 = Rp 95 million/year  35 = 35
Benefit B2 = Rp 75 million at end of 595year  = 95
Disbenefit D = Rp 3.2 million/year 75(A/F, 8, 5)
= 12.7845
3 2 = 3.2
( A / P , 8 , 5 ) = 0 . 25046 (A /F , 8 , 5 ) =
0 .1 7 0 4 6
B / C = [( 95 + 12 . 7845 ) – 3 . 2 ]/( 56 . 3535 + 35 ) =
1 . 1448
B - C = [( 95 + 12 . 7845 ) – 3 . 2 ] – [ 56 . 3535 +
35
8 ] = Rp 13 . 231 million SI-4251 Ekonomi Teknik
Comparing two alternatives using B/C
analysis
Overpass A Tunnel B
Initial cost 1,250 million 3,500 millions
Yearly maintenance cost 27.50 million 55 million
Road user cost per year 425 million 350 million
Useful life 20 years 20 years
Interest rate 10%
COST :
EUAWA = 1,250 (A/P, 10, 20) + 27.50 = 1,250 (0.1175) + 27.50 = 174.375 million
EUAWB = 3,500 (A/P, 10, 20) + 55.00 = 3,500 (0.1175) + 55.00 = 466.250 million
Δ Cost = EUAWB – EUAWA = 466.250 – 174.375 = 291.875 million

BENEFIT :
EUAWA = 425 million EUAWB = 350 million Δ Benefit = 425-350 = 75 million

B / C = 75 / 291 . 875 = 0 . 2570


B - C = 75 – 291 . 875 = - 216 . 875
9 SI-4251 Ekonomi Teknik
Selection form Mutually Exclusive
Alternatives
Incremental B/C Analysis


X Y Z
Initial cost - 250,000,000 -240,000,000 -320,000,000
Yearly expenses - 135,000,000 -123,500,000 -130,000,000
Yearly revenues 390,000,000 381,000,000 420,500,000
Salvage value 45,000,000 52,000,000 202,000,000
period 5 5 5
Interest rate 12%

10 SI-4251 Ekonomi Teknik


Selection form Mutually Exclusive
Alternatives (benar)
Incremental B/C Analysis

 Y X Z
Initial cost, (I) -240,000,000 -250,000,000 -320,000,000
Yearly expenses, (C) -123,500,000 -135,000,000 -130,000,000
Yearly revenues, (B) 381,000,000 390,000,000 420,500,000
UAEW of Salvage value, (B) 52,000,000 45,000,000 202,000,000
Overall B/C
B – C
Alternative to compare
Incremental benefit
Incremental cost
Incremental B/C
Decision

8-11 S I-4 2 5 1 E ko n o m iTe kn ik


Selection form Mutually Exclusive
Alternatives (benar)
Incremental B/C Analysis

 Y X Z
Initial cost, (I) -240,000,000 -250,000,000 -320,000,000
Yearly expenses, (C) -123,500,000 -135,000,000 -130,000,000
Yearly revenues, (B) 381,000,000 390,000,000 420,500,000
UAEW of Salvage value, (B)
Overall B/C >1 <1
B – C
Alternative to compare YES Y to Z
Incremental benefit 262,219,000
Incremental cost 101,176,800
Incremental B/C 2.5
Decision Z

8-12 S I-4 2 5 1 E ko n o m iTe kn ik


Homework #8
 A ready-mix concrete producer is considering to install a new
mixer system:
Operating characteristics System A System B System C

Installed cost ($) 2,250,000 2,950,000 2,750,000

Annual Operating cost ($) 320,000 495,000 401,500

Annual production (cm) 10,500 21,200 19,900

Unit price ($/cm) 122.50 122.50 122.50
 Overhaul cost ($/ 2 years) 220,000 245,000 295,000
 Salvage value ($) 221,500 308,000 367,500

 Useful life (year) 3 4 4

 at rate of return 10% determine which system should


be installed using B/C analysis?


13 SI-4251 Ekonomi Teknik

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