Engineering Economic Analysis

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Incremental Benefit-Cost Analysis 501

Examples 16-4 and 16-5 illustrate the use of the incrementalB/Cratio and show how

the conventionaland modified versions can be used with this procedure to evaluate sets of

mutually exclusive alternatives.

A midwestern industrial state is considering the construction and operation of facilities to provide

electricity to several state-owned properties. Electricity will be provided via two coal-burnirig

power plants and a distribution network wired to the properties targeted for conversion. A group

studying the proposal has identified general cost and benefit categories for the project as follows.

Primary costs:Construction of the power plantfacilities; cost of installing the power distri-

bution network; life-cycle maintenance and operating costs.

Primary benefits:Elimination of payments to the current electricityprovider; creation ofjobs

for construction, operation, and maintenance of the facilities and distribution network;

revenue from selling excess power to utility companies; increased employment at coal

mines in the state.

Assume that there have been four competing designs identified for the power plants. Each design

affects costs and benefits in a unique way. Given the following data for the four mutually exclusive

design alternatives, use theconventional BICratio method to recommend a course of action.

Values (x $104) for Competing Design Alternatives

II

Alternatives I through IV constitute a set ofmutually exclusivechoices because we will select

one and oWy one, of tp~ d~sign QpqoY§,fot;.tl:1~PoWef~g~~Qts,J)lerefore, an~incremental BIC ratio ~j:i

:methodis usedto obtainthe solution.Let us use the incrementalmethodas describedabove:

Step 1 The alternatives are do nothin~, and designs I, II,m, and IV.

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II III IV

Project costs
! Plant constructioncost $12,500 $11,000 $12,500 $16,800

Annual operatiIig and maintenance cost^120480450145

Project benefits
Anoual savings from utility payments^580700950 1,300
1 .mue from over;capacity 700'^550200250
Annual effect of jobs created^400750150500
Other data
Project life, in years^45454545
Discounting rate (MARR) 8% 8% 8% 8%