Engineering Economic Analysis

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504 ECONOMIC ANALYSISIN THEPUBLICSECTOR

,Again Alternative ill would be eliminated from further consideration because itsB/C

ratio isless than 1.0.In this case we will eliminate it from the feasible set, which now

becomes do nothing and alternative designs I, II, and IV.

Step 3 The PW of costs for each alternative in the feasible set:

PW Costs (I) =$12,500

PW Costs (II) = $11,000

PW Costs (IV) = $16,800

The appropriate rank order is now do nothing, II, I, IV. Notice that themodified B/C

ratio produces a rank order different from that yielded by theconventionalversion in

Example 16-4.

Step 4 The firstincrementis now (donothing~ Alternative11).The methodproceedsfrom

this point.

Steps 5 and 6 These steps are accomplished as follows.

As an example of the calculations in the forgoing table, consider the third increment

(II ~ IV).

f

.6.Plant construction cost

PW of !!:.Costs

!!:.Annual utility payment savings

!!:.Annual overcapacity revenue

.6.Annual benefits of new jobs

.6.Annual O&M disbenefit

PW of !!:.Benefits

.6.B/Cratio, (PW~~B:)/(P~~C)

=16,800 ~ 11,000 = $5800

= $5800

= 1300"7700 = $600

= 250 - 550 = -$300

• 500 - 750 = -$250
  = 145- 480 = -$335

= (600 - 300 - 250 +335)(P I A,8%,45)=,y-..$4662.~

= 0;; 4fi62/5800=0~8~Q ~~ =~ =.. ..

"

When the modified version of the BICratio is used, Alt. II emerges as the recommended

power plant design-just as it did when we used the conventionalB/C ratio.

1

iI

I

J

J

Increment

Incremental Effects (Do Nothing-+II) (II-+I) (II-+IV)

Plant construction cost $11,000 $ 1500 $ 5800

PW of Costs 11,000 1500 5800

Annual utility payment savings^700 -120^600

Annua1 overcapacity revenue^550150 -300

Annua1 benefits of new jobs^750 -350 -250

Annual O&M disbenefit 480 -360 -335

PW of Benefits 18,405 484 4662

B/C ratio (pW B)/(PW C) 1.67 0.32 0.80

Is increment justified? Yes No No