Engineering Economic Analysis

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Other Effectsof Public Projects 507

With this project we examine the effect that varying project lives and interest rates have on the

conventional BjC ratio. Project lives at 15,30, and 60 years and interest rates at: 3, 10, and 15%

are used to calculate the ratio for the investment. The ratio for each combination of project life

and interest rate is tabulated as follows:

Conventional Benefit-Cost Ratio for Various

Combinations of Project Life and Interest Rate

Interest

As an example of how the ratios are calculated, suppose that life = 30 years and interest

rate=10%.

1,500,000+ 500,000 =1.03

ConventionalBjCratio= (10,000+ 5,500,000+ 500,000)(Aj P,10%,30)+ 350,000

From these numbers one can see the effect of project life and interest on the analysis and rec-
ommendation. At the lower interest rate, the project has BjC ratios above 1.0 in all cases of
project,life, while at the higher rate the ratios are all less than 1.0. At an interest rate of 10% the
recommendation to invest changes from noat a life of 15 years toyes at 30 and 60 years. By
manipulating these two parameters (project life and interest rate), it is possible to reach entirely
different conclusions regarding the desirability of the project. The key point is that those advo-
cating '~nvestment" are well advised to use lower interest rates and longer project life in their
example calculations.
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Project Politics.

To some degree political influences are felt in nearly every decision made in any organi-

zation. Predictably, some individual or group will support its own particular interestsover

competing views. This actuality exists in both government and nongovernmentorganiza-

tions. In government the effects of politics are continuouslyfelt at a111evelsbecause of the

large-scale and multipurpose nature of projects and because government decision making

involves the use of the citizenry's common pool of money.

To illustrate on a small scale situations faced by government, compare the decision-

making process a family may face when planning an evening out. As most families can

attest, this decision is not always easy--even when Dad is footing the bill! Imagine the

increased level of conflict that would arise if every member of the family were to con-

tribute to the tab. Perhaps the choices would then be dine out, go to a ball game, have a

shopping spree at the mall, loan the money to Mom, or put it into the family bank account.

This scenario characterizes governmentinvestmentdecisions-individnals and groupswith-"~- - -- .~

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Project Life(years) 3% 10% 15%

15 1.24 0.86 0.69

30 1.79 1.03 0.76

60 2.24 1.08 0.77