Engineering Economic Analysis

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498 ECONOMIC ANALYSIS IN THE PUBLIC SECTOR

For decision making, the two versions of the benefit-cost ratio will produce the same

recommendation on whether toinvestornot investin the project being considered. The

numeric BIe ratiofor the two versionswill not alwaysbe the same, but the recommendation

will be. This fact is illustrated in Example 16-3.

Consider the highway expansion project from Example 16-2. Let us use the present worth

formulation ofconventionalandmodifiedversions to calculate the BICratio.

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\SOlUTION

Using theConventional B/CRatio

BICratio. =225,000(PI A,8%, 30) +300,000(PI F,8%, 30)=^1 .1^5

1,500,000 +65,000(PIA,8%, 30)

Using theModified BIC Ratio

. 225,000(P I A,8%, 30) +300,000(P I F,8%,30) - 65,000(P /A, 8%, 30)

B/Craho = = 1.22

1,500,000

Whether the conventional or the modified ratio is used, the recommendation is to invest in the

highway expansion project. The ratios are not identical in magnitude (1.15 vs 1.22), but the

decision is the same.

It is important when one is using the conventional and modified BICratios not to

directly compare the magnitudes of the two versions. Evaluating a project with one version

may produce a higher ratio than i&produced with the other version, but this does not imply

that the project is somehow better..

Thenet benefits to the usersof governmentprojects are the differencebetween the ex-

pectedbenefitsfrom investmentminus the expecteddisbenefits.Disbenefitsare the negative

effects of governmentprojects felt by some individuals or groups. For example,consider the

National Park System in the United States. Development projects by the skiing or lumber

industries might provide enormous benefits to the recreation or construction sectors while

creating simultaneous disbenefits for environmental groups. Table 16-2 illustrates some of

the primary benefits and disbenefits of several example public investments.

Incremental Benefit-Cost Analysis CONTENTS xv

In Chapter 9 we discussed using the incremental benefit-cost ratio in economic decision

analysis.As is the case with the internalrate of return (IRR) decisionmethod, the incremental

B/C ratio should be used in comparingsets of mutually exclusive alternatives.This method

produces a result that is consistent with the result produced by optimizing the present worth