1) The Ford Foundation expects to award $15 million in grants to public high schools

to
develop new ways to teach the fundamentals of engineering that prepare students for
university -level material. The grants will extend over a 10-year period and will create
an estimated savings of $1.5 million per year in faculty salaries and student-related
expenses. The Foundation uses a rate of return of 6% per year on all grant awards.
This grants program will share Foundation funding with ongoing activities, so an
estimated $200,000 per year will be removed from other program funding. To make this
program successful, a $500,000 per year operating cost will be incurred from the regular
M&O budget. Use the B/C method to determine if the grants program is economically
justified.
Solution
Use annual worth as the common monetary equivalent. All three B/C models are used
to evaluate the program.
AW of investment cost. $15,000,000(A/ P,6%, 10) = $2,038,050 per year
A W of benefit. $1,500,000 per year
A W of dis benefit. $200,000 per year
AW of M&O cost. $500,000 per year
Use Equation [9.2] for conventional B/C analysis, where M&O is placed in the denominator
as an annual cost.
BIC = 1,500,000 - 200,000
2,038,050 + 500,000
The project is not justified, since BIC < 1.0.
1,300,000 = 0.5 1
2,538,050
By Equation [9.3] the modified BIC ratio treats the M&O cost as a reduction to
benefits.
M difi d B/C = 1,500,000 - 200,000 - 500,000 = 0.39
o e 2,038,050
The project is also not justified by the modified B/C method, as expected.
For the (B - C) model, B is the net benefi t, and the annual M&O cost is included
with costs.
B - C = ( 1,500,000 - 200,000) - (2,038,050 + 500,000) = $- 1.24 million
Since (B/C) < 0, the program is not justified.
321

2) The city of Garden Ridge, Florida, has received designs for a new patient room wing to
the municipal hospital from two architectural consultants. One of the two designs must
be accepted in order to announce it for construction bids. The costs and benefits are the
same in most categories, but the city financial manager decided that the three estimates
below should be considered to determine which design to recommend at the city council
meeting next week and to present to the citizenry in preparation for an upcoming bond
referendum next month.
The patient usage cost is an estimate of the amount paid by patients over the insurance
coverage generally allowed for a hospital room. The discount rate is 5%, and the life of

the building is estimated at 30 years.

(a) Use conventional BtC ratio analysis to select design A or B.
(b) Once the two designs were publicized, the privately owned hospital in the directly
adjacent city of Forest Glen lodged a complaint that design A will reduce
its own municipal hospital's income by an estimated $500,000 per year because
some of the day-surgery features of design A duplicate its services. Subsequently,
the Garden Ridge merchants' association argued that design B could reduce its
annual revenue by an estimated $400,000, because it will eliminate an entire
parking lot used by their patrons for short-term parking. The city financial manager
stated that these concerns would be entered into the evaluation as disbenefits
of the respective designs. Redo the BtC analysis to determine if the economic
decision is still the same as when disbenefits were not considered

Solution
(a) Since most of the cash flows are already annualized, the incremental BtC ratio
will use AW values. No disbenefit estimates are considered. Follow the steps of
the procedure above:
1. The AW of costs is the sum of construction and maintenance costs.
A W A = 1 O,OOO,OOO(A/ P,5%,30) + 35,000 = $685,600
AWB = 15,OOO,000(A/P,5%,30) + 55,000 = $1,030,750
2. Design B has the larger AW of costs, so it is the alternative to be incrementally
justified. The incremental cost value is
C = AWB - AW A = $345,250 per year
3. The AW of benefits is derived from the patient usage costs, since these are
Consequences to the public. The benefits for the B/C analysis are not the
costs themselves, but the difference if design B is selected. The lower
usage cost each year is a positive benefit for design BilB
= usageA - usageB = $450,000 - $200,000 = $250,000 per year
4. The incremental BtC ratio is calculated by Equation [9.2].
$ 250,000
B/C ==. =¿ = 0.72
$ 345,250
 3) Demonstrate that for a highway expansionproject with data given as follows,the
sameBIC ratio is obtained using the present, future, and annual worth formulations.
Initial costs of expansion $1,500,000

Annual costs for operating/maintenance 65,000

Annual savings and benefits to travelers 225,000

Scrap value after useful life 300,000

Useful life of investment 30 years

Interest rate 8%

Using Present Worth

PW benefits = 225,000(P /A, 8%, 30) + 300,000(P IF, 8%, 30) =$2,563,000
PW costs = 1,500,000+ 65,000(P /A, 8%, 30) = $2,232,000

Using Future Worth

FW benefits = 225,;00(F /A,=8%,30)+ 300,000 =25790000
FWcosts= 1,500,000(F /P, 8%,30) + 65,000(FI A, 8%,30) =$22,460,000

Using Annul Worth

AWbenefits =225,000+ 300,000(A/F, 8%,30) = $227,600
AWcosts = 1,500,000(A/ P, 8%,30) + 65,000 = $198,200

4) The cost of grading and spreading gravel on ashort rural road is expected to be
$300,000. The road will have to be maintained at a cost of $25,000 per year. Even
though the new road is not very smooth, it allows access to an area that previously
could only be reached with off-road vehicles. The improved accessibility has led to a
150% increase in the property values along the road. If the previous market value of
a property was $900,000,calculate the B/C ratio using an interest rate of 6% per
year and a 20-year study period.
Solution
B = 900,000(1.5) – 900,000 = $450,000
C = 300,000 + 25,000(P/A,6%,20)
= 300,000 + 25,000(11.4699)
= $586,748
B/C = 450,000/586,748 = 0.77
EXAMPLE 10.1 In a particular locality of a state, the vehicle users take aroundabout route
to reach certain places because of the presence of a river. This results in excessive travel
time and increased fuel cost. So, the state government is planning to construct a bridge
across the river. The estimated initial investment for constructing the bridge is Rs.
40,00,000. The estimated life of the bridge is 15 years. The annual operation and
maintenance cost is Rs. 1,50,000. The value of fuel savings due to the construction of the
bridge is Rs. 6,00,000 in the first year and it increases by Rs. 50,000 every year thereafter
till the end of the life of the bridge. Check whether the project is justified based on BC ratio
by assuming an interest rate of 12%, compounded annually.

Total present worth of costs = Initial investment (P)+ Present worth of annual operating
and maintenance cost (CP) = P + CP
= Rs. 40, 00,000 + 1, 50,000 _ (P/A, 12%, 15)
= Rs. 40, 00,000 + 1, 50,000 _ 6.8109
= Rs. 50, 21,635

Total present worth of fuel savings (BP):

A1 = Rs. 6, 00,000
G = Rs. 50,000
n = 15 years ,i = 12%
Annual equivalent fuel savings (A) = A1 + G (A/G, 12%, 15)
= 6, 00,000 + 50,000 (4.9803)
= Rs. 8, 49,015
Present worth of the fuel savings (BP) = A(P/A, 12%, 15)
= 8, 49,015 (6.8109)
= Rs. 57, 82,556

EXAMPLE 10.2 A state government is planning a hydroelectric project for a river basin. In
addition to the production of electric power, this project will provide flood control, irrigation and
recreation benefits. The estimated benefits and costs that are expected to be derived from this
project are as follows:

Initial cost = Rs. 8, 00, 00,000

Annual power sales = Rs. 60, 00,000

Annual flood control savings = Rs. 30, 00,000

Annual irrigation benefits = Rs. 50, 00,000

Annual recreation benefits = Rs. 20, 00,000

Annual operating and maintenance costs = Rs. 30, 00,000

Life of the project = 50 years

Check whether the state government should implement the project (Assume

i = 12%)

Solution

Initial cost = Rs. 8, 00, 00,000

Annual power sales = Rs. 60, 00,000

Annual flood control savings = Rs. 30, 00,000

Annual irrigation benefits = Rs. 50, 00,000

Annual recreation benefits = Rs. 20, 00,000

 Annual operating and maintenance costs = Rs. 30, 00,000

Life of the project = 50 years, i = 12%

Total annual benefits = Flood control savings + Irrigation benefits+ Recreation benefits

= Rs. 30, 00,000 + Rs. 50, 00,000 + Rs. 20, 00,000

= Rs. 1, 00, 00,000

Present worth of the benefits = Total annual benefits _ (P/A, 12%, 50)

= 1, 00, 00,000 _ (8.3045)

= Rs. 8, 30,45,000

Present worth of costs = Initial cost + Present worth of annual operating and maintenance cost–
Present worth of power sales

= Rs. 8, 00, 00,000 + 30, 00,000 _ (P/A, 12%, 50)

– 60, 00,000 (P/A, 12%, 50)

= Rs. 8, 00, 00,000 + 30, 00,000 _ 8.3045

– 60, 00,000 _ 8.3045

= Rs. 5, 50, 86,500