Engineering Economic Analysis

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502 ECONOMIC ANALYSISIN THE PUBLIC SECTOR

Step 2 In this optional step we calculate theconventionalB/C ratio for each alternativebased

on individual cash flows. We will use the ratio of the PW of benefitsto costs.

B/C ratio (I) =(580 + 700 +400)(P/A,8%,45)/[12,500 +120(P/A,8%,45)] = 1.46

B/C ratio (II) = (700 + 550 +750)(P/A,8%,45)/[11,000 +480(P/A,8%, 45)]=1.44

B/C ratio (III)=(200+ 950+150)(P/A,8%,45)/[12,500 +325(P/A,8%,45)] = 0.96.

B/C ratio (IV)=(1300 + 250 +500)(P/A,8%,45)/[16,800 + 145(P/A,8%,45)] = 1.34

Alternative I, n, and IV all have B/C ratios greater than 1.0 and thus are included in

the feasible set. Alternativeill does not meet the acceptability criterion and should be

eliminated from further consideration. However, to illustrate that Step 2 is optional,

we will continue with.all four design alternativesin the original feasible set.

Step 3 Here we calculate the PW of costs for each alternative in the feasible set (remember

we are keeping alternativeill along for the ride). The denominator of theconventional

B/C r~tio includes first cost and annual O&M costs. We calculate the PW of costs for

each alternative as follows.

PW costs (I) = 12,500+120(P/A,8%,45)= $13,953

PW costs (II) = 11,000 +480(P/A,8%, 45) = $16,812

PW costs (III) = 12,500 +325(P/A,8%, 45) = $16,435

PW costs (IV) = 16,800 + 145(P/A,8%,45)=$18,556

..
The rank order from low to high value of the B/C ratiodenominatoris as follows: do
nothing, I, ill, n, IV.
Step 4 From the ranking list, the first increment considered is that of going from "do nothing"
to Alternative I (do nothing -+ Alternative I). The analysis proceeds from this point.
Steps 5 and 6 We proceed through the analysis, designating the incremental cash flows and calcu-
lating Ll(B/C) until all feasible alternatives have b~en considered. Each additional
increment taken under consideration must be based on the last justified increment.