Engineering Economics: Financial
Decision Making for Engineers
Seventh Edition
Chapter 10
Public Sector Decision
Making
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10 - 1
Learning Goals
10.1 Recognize examples of market failure and know
available remedies for it.
10.2 Establish an appropriate point-of-view for costbenefit analysis.
10.3 Determine and calculate the costs and benefits of
public projects.
10.4 Calculate and evaluate the benefit-cost ratio of a
public project.
10.5 Choose an appropriate MARR for use in public
projects.
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Introduction (1 of 2)
• All organizations and the engineers who work for
them need to understand their social impact.
• Consider two examples:
1. The industrial revolution and the invention of
mechanized factory systems.
2. The extraction of coal and the production of steel
in Nova Scotia.
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Introduction (2 of 7)
• The industrial revolution and the invention of
mechanized factory systems:
– Many technological innovations that supported mass
production.
– Although the transformation enhanced society’s
quality of life:
There have been adverse effects on the environment
and human health.
– Air and water pollution.
– Over the past 150 years, concentration of CO2 has
caused warming of the planet.
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Introduction (3 of 7)
• Continued pollution will affect future generations
through extreme weather conditions.
• Through the Paris Agreement, Canada is committed
to reducing GHG emissions.
• To achieve emission targets, Canada:
– Promotes investments in renewable energy
generation.
– Places a cost for polluting.
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Introduction (4 of 7)
• In addition to considering the direct cost of
production, manufacturers must:
– Add the cost of environmental pollution in their cost
calculations.
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Introduction (5 of 7)
• The extraction of coal and the production of steel
in Nova Scotia.
– Once the mainstay of the economy of Nova Scotia.
– Now the site of one of North America’s largest
environmental disasters.
The Sydney Tar Pond.
– For more than 80 years, toxic wastes were
discharged into Muggah Creek.
– Steel mills were finally closed in 2000.
– Sydney has one of the highest rates of:
Cancer, birth defects and miscarriages
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Introduction (6 of 7)
– Residents have filed a $1 Billion lawsuit.
• Environmental pollution has important implications
for engineers.
– It is not enough to produce goods and services at a
cost that consumers are willing to pay.
– Engineers must pay attention to broader social
values.
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Introduction (7 of 7)
• When we consider the broader social context, the
concept of profitability is extremely difficult to define
because the frame of reference is society at large.
– Market prices that guide most production
decisions may not reflect all the social benefits
and costs of engineering decisions adequately.
– Social costs and benefits are more difficult to
identify and value in a quantifiable manner.
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10.1 Market Failure (1 of 7)
• Market - group of buyers and sellers linked by trade
in a particular product or service.
• Prices guiding decisions usually reflect all the social
benefits and costs of engineering decisions
adequately.
• When prices do not reflect this, there is market
failure.
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10.1 Market Failure (2 of 7)
• Society will seek a means of correcting the failure.
• Social, environmental or ethical issues not captured
by transactions are called externalities. Classic
examples relating to transportation infrastructure
include traffic congestion, noise pollution and air
quality.
• Liberal economists often advocate for internalizing
externalities: charging the producer of an externality
so that it must then be incorporated in the
calculation.
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10.1 Market Failure (3 of 7)
Market Failure Defined
• Market failure occurs when a market, left on its own,
fails to make decisions where resources are
allocated efficiently.
– Aggregate social costs are higher than aggregate
social benefits.
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10.1 Market Failure (4 of 7)
Market Failure Defined
• Markets fail for several reasons:
– Those affected are unable to communicate their costs in
the marketplace, or they are unable make sure their
costs are incorporated into pricing.
– The market has insufficient information about the full
range of gains/losses resulting from decisions.
– A monopolist can influence price or output.
– Someone decides not to do something that creates
external benefits. For instance, the private cost of
creating that benefit is less than the value of the social
benefit but higher than the value of private benefit.
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10.1 Market Failure (5 of 7)
Market Failure Defined
• Market failure has led to:
– Damage to the residents of Sydney, Nova Scotia
Due to air pollution and toxic waste
Negative health effects
Damage to fisheries
• Market failure can cause socially undesirable
outcomes.
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10.1 Market Failure (6 of 7)
Remedies for Market Failure
• Formal methods to remedy market failure:
1. Government-set policy instruments (e.g., regulations
such as standards, bans, permits, or quotas; monetary
incentives and deterrents)
2. Ability to seek compensation in courts
3. Government provision of goods and services, such as
parks, police, health care, infrastructure, education,
roads, justice system, fire/ambulatory services, etc.
• Informal methods can also be effective:
– Boycotts, political lobbying, dissemination of
information to public, etc.
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10.1 Market Failure (7 of 7)
Remedies for Market Failure
• Formal methods for considering market failure are
ways to internalize externalities.
– Ensures external benefits and costs are incorporated
in economic decision making.
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10.2 Decision Making in the Public
Sector (1 of 10)
Public production in Canada is mainly in two classes:
1. Services which are not practical to require people to
(directly) pay for: Police /fire protection, national
defense, maintenance of city streets.
2. Services for which scale economies make it inefficient
to have more than one provider, i.e., natural gas,
electricity.
– Single provider may charge excessive prices or be
inefficient.
– Alternative is for government to monitor/regulate
performance.
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10.2 Decision Making in the Public
Sector (2 of 10)
• Privatization of traditionally-run government functions
has been a growing trend (ex. Ontario Power
Generation is a private monopolist).
– Proponents argue that the private sector is more
efficient than the government in its operations.
– Those against argue that private organizations will
not take into the account all the social costs and
benefits
Contribute to the potential market failure.
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10.2 Decision Making in the Public
Sector (3 of 10)
• Cost–Benefit Analysis (CBA) is a project
evaluation method.
– General framework for assessing the gains/losses of
alternative projects when a broad societal view is
needed.
– Also used in the private sector.
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10.2 Decision Making in the Public
Sector (4 of 10)
Close-Up 10.1: Public Private Partnerships
• Traditionally, large-scale public infrastructure
projects have been financed, built and maintained by
the Government.
– Many countries are now moving toward public-private
partnerships (PPP or P3).
• A PPP or P3 is a contractual agreement between the
government and a private organization to provide a
service or product to society.
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10.2 Decision Making in the Public
Sector (5 of 10)
Close-Up 10.1: Public Private Partnerships (Cont.)
• The public sector usually maintains an oversight and
quality-assessment role.
• The private sector is responsible for provision of the
service or project.
• Numerous categories of P3s exist.
– E.g. BOOT (build-own-operate-transfer); BOT (buildoperate-transfer)
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10.2 Decision Making in the Public
Sector (6 of 10)
Close-Up 10.1: Public Private Partnerships (Cont.)
• Examples of P3s:
– Confederation Bridge between NB and PEI
– Royal Ottawa Mental Health Centre
– 407 ETR Toll Highway
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10.2 Decision Making in the Public
Sector (7 of 10)
The Point of View Used for Project Evaluation
• For comparison purposes, benefit/cost ratios are
used.
– Comparison methods of Chapters 4 and 5 are
applicable.
• Before conducting a CBA, it is important to identify:
– Who will benefit from the project?
– Who will pay for the project?
• Identifying these two “points of view” clearly, avoids
confusion about what to include/what not to include.
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10.2 Decision Making in the Public
Sector (8 of 10)
The Point of View Used for Project Evaluation
• Generally, members of society are the
users/beneficiaries of project services, and the
government is the sponsor.
• Challenge may be that there are several reasonable
points of view.
– Each with a different set of users or sponsors to be
included.
• This can lead to ambiguity/controversy over the
results.
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10.2 Decision Making in the Public
Sector (9 of 10)
The Point of View Used for Project Evaluation
• The point of view chosen delineates whose costs
and benefits are to be taken into account in a costbenefit analysis.
• CBA is the common framework to analysis.
• Analysis should consider costs and benefits
associated with the project based on:
– the difference between what would occur with the
project
– what would occur without the project
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10.2 Decision Making in the Public
Sector (10 of 10)
The Point of View Used for Project Evaluation
• We concern ourselves with the marginal benefits
and costs associated with the project so that its
impact is fairly measured.
• Consider a highway improvement project:
– Govt. costs (construction and maintenance)
– Govt. savings (higher land and home values increase property
tax income)
– Social benefits include reduced travel time, increased economic
activity
– Social costs include construction disruptions, traffic noise and
negative environmental impact
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (1 of 13)
• Once we understand who will benefit from a project
and who will pay for it,
– Next step in a CBA is to identify and measure the
various costs and benefits associated with the
project.
In what ways will users benefit from the project,
and by how much will they benefit?
What costs will be incurred by the sponsor, and
how much will these costs be?
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (2 of 13)
Identifying and Measuring the Costs of Public Projects
• Generally, costs are classified into the initial capital
costs and ongoing operating and administration
costs.
• If the project generates savings, these are deducted
from costs to produce a net cost to the sponsor.
• Some costs may be directly attributable to a project
(direct costs), while others may be stimulated
indirectly by the project (indirect costs).
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (3 of 13)
Identifying and Measuring the Benefits of Public Projects
• The benefits of a project to society include the value
of all goods/services that result from the project or
program.
• Some of the social effects from a project may be
negative.
• These negative effects are referred to as social
costs and are subtracted from benefits to obtain a
net measure of social benefits.
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (4 of 13)
Identifying and Measuring the Benefits of Public Projects
• Some of the social benefits and social costs may be
directly attributable to a project (direct benefits),
while others may be stimulated indirectly by the
project (indirect benefits).
• Direct benefits of a highway traffic project would
include decreased travel time and improved safety.
Indirect benefits would be increased home values.
• Indirect costs include lost business to other areas
from which traffic has been rerouted. Direct costs are
noise pollution and congestion due to construction.
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (5 of 13)
Identifying and Measuring the Benefits of Public Projects
• Challenges arise because the benefits may not be
reflected in the monetary flows of the project.
– i.e., real cash flows for road construction (costs, tax
revenue)
– vs…intangible cost of traffic disruption during road
construction
• Challenge of assigning a value or measure to each.
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (6 of 13)
Identifying and Measuring the Benefits of Public Projects
• Intangible goods/services can be challenging to
value.
– i.e., improved health and safety, value of noise
abatement, value of the environment
• Two methods used to value “intangible”
benefits/costs:
– Contingent valuation
– Hedonic price
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (7 of 13)
Identifying and Measuring the Benefits of Public Projects
• Contingent valuation:
– Uses surveys to ask members of the public what they
would be willing to pay for the good or service in
question (how much would you pay for each minute of
reduced travel time?)
• Hedonic price method:
– Involves deducing, indirectly, individuals’ valuations
based on their behavior in other markets for goods
and services (looking at value of homes before and
after project; money spent on noise insulation, etc.)
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (8 of 13)
Example 10.1
Consider the construction of a bridge across a narrow
part of a lake that gives access to a provincial park.
The major benefit of the bridge will be reduced travel
time to get to the park from a nearby urban centre.
This will lower the cost of camping trips at the park.
More people are expected to use the park because of
the lower cost per visit. How can these benefits be
measured?
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (9 of 13)
Example 10.1
Table 10.1 Average Cost per Visit and Number of Visits per Year
blank
Travel cost per visit ($)
Use of equipment ($)
Food cost per visit ($)
Total cost per visit ($)
Number of visits/year
Without Bridge
140.00
50.00
100.00
290.00
8000
With Bridge
87.50
50.00
100.00
237.50
11 000
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects
Figure 10.1
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (10 of 13)
Example 10.1 Solution
1. Reduction in travel cost for 8000 visits that would
be made even without the bridge creates benefit of:
8000×($290.00 − $237.50) = $420 000
2. Number of visits expected to rise to 11 000 / year.
– Before bridge, cost of week-long park visit was $290.
– With bridge built, cost to visit park would fall to
$237.50.
– Each of extra 3000 visits is worth at least $237.50.
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (11 of 13)
Example 10.1 Solution (Cont.)
• Standard approximation is halfway between
highest/lowest.
• Therefore, the benefit (value) of the incremental
3000 visits per year is the average net gain
associated with the incremental visits:
(½)($290 – $237.50)×3000 = $78 750
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (12 of 13)
Example 10.1 Solution (Cont.):
• The total benefits of the project are therefore:
$420 000 + $78 750 = $498 750
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10.3 Identifying and Measuring the Costs
and Benefits of Public Projects (13 of 13)
Figure 10.1
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10.4 Benefit – Cost Ratios (1 of 13)
• Same comparison methods that are used for private
sector projects are appropriate for public sector
projects.
– e.g., PW, AW, IRR
• Benefit–cost ratios are commonly used in private
sector. However, it is important to understand them
because there are several problems associated with
them that the user needs to be aware of.
• Benefit–cost ratios can be based on PW or AW.
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10.4 Benefit – Cost Ratios (2 of 13)
• The conventional benefit–cost ratio (BCR) is given
by:
PW (users’ benefits )
BCR =
PW (sponsors’ costs )
• A project is considered desirable if its BCR > 1.
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10.4 Benefit – Cost Ratios (3 of 13)
• Modified benefit-cost ratio (BCRM)
PW(users' benefits) - PW(sponsors' operating costs)
BCRM =
PW(sponsors' capital costs)
• BCRM has the advantage of providing a measure of
the net gain per dollar invested by the project
sponsor.
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10.4 Benefit – Cost Ratios (4 of 13)
Example 10.2 on Page 330
• The Town of Elmira, Ontario, has limited parking for cars near its
main shopping street. The city initially considered adding a free
parking lot, but local environmental and poverty activists rallied
against the project. A paid lot was then proposed, since free parking
projects use tax dollars on benefits that are only enjoyed by wealthier
citizens. The main beneficiaries will be the merchants and their
customers. The present worth of expected benefits is $3m. The cost
to the town of buying the lot, clearing, paving, and painting is
expected to be $500k. The present worth of expected maintenance
costs over the lifetime of the project is $50k. During the period when
the lot is being cleared and paved, there will be some disbenefits to
the local merchants and customers due to disruption in the King
Street area. The present worth of the disruption is expected to be
about $75k. What is the benefit-cost ratio?
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10.4 Benefit – Cost Ratios (5 of 13)
Example 10.2 Solution
PW (user' benefits) 3 000 000 - 75 000
BCR =
=
= 5.3
PW(sponsors' costs)
500 000 + 50 000
The proposal is economically justified as the benefitcost ratio is greater than 1.
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10.4 Benefit – Cost Ratios (6 of 13)
Example 10.3 on page 331
• A fire department in a medium-sized city is
considering new dispatch system for its fire-fighting
equipment responding to calls. The system would
use AI to select routes, taking into account recently
updated traffic conditions. This would reduce
response times. An indirect effect would be the
reduction in required fire-fighting equipment. The
present worth values of benefits and costs are:
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10.4 Benefit – Cost Ratios (6 of 13)
Example 10.3 continued
• User’s Benefits
– PW(benefits) = 37,500,000
• Sponsor’s Costs
– PW(operating costs) = 3,750,000
– PW(capital costs for the city) = 13,500,000
– PW(reduced equipment requirements) = 2,250,000
• What is the benefit-cost ratio for the dispatch system?
What is the modified benefit-cost ratio for the dispatch
system? Is the project economically justifiable?
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10.4 Benefit – Cost Ratios (7 of 13)
Example 10.3 Solution
BCR= 37 500 000 / (13 500 000 + 3 750 000 – 2 250 000)
= 2.50
BCRM = (37 500 000 − 3 750 000) / (13 500 000 – 2 250 000)
= 3.00
• Both conventional & modified cost–benefit ratio
are > 1.
• The project under either criterion is economically
justified.
• Note: If BCR>1, then BCRM>1 as well. Therefore, they
result in the same decision.
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10.4 Benefit – Cost Ratios (8 of 13)
• Evaluate economic viability of projects with BCR/MBCR.
– For independent projects and mutually exclusive
projects.
• For independent projects use following decision rule:
Accept all projects with a benefit–cost ratio greater than 1.
PW (users’ benefits)
BCR =
>1
PW (sponsors’ costs )
MBCR =
PW (users’ benefits)- PW (sponsors’ operating costs)
PW (sponsors’ capital costs )
>1
• This is equivalent to the rule to accept any project for
which PW(MARR) > 0
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10.4 Benefit – Cost Ratios (9 of 13)
• To use benefit–cost ratios to choose among
mutually exclusive projects, perform incremental
analysis.
• Suppose mutually exclusive projects, X and Y, with
PW of benefits, BX and BY, & PW of costs, CX and
CY.
• First, we discard projects with a BCR < 1.
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10.4 Benefit – Cost Ratios (10 of 13)
• If both projects have BCR > 1, we rank the projects
in ascending order by the present worth of costs.
• if CX ≥ CY, then form the ratio of the differences in
benefits and costs:
BX - BY
BCR ( X - Y ) =
CX - CY
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10.4 Benefit – Cost Ratios (11 of 13)
• If BCR(X−Y) > 1, X is preferred. Otherwise, Y is
preferred.
• If CX = CY (in which case the ratio is undefined), we
choose the project with the greater present worth of
benefits.
• If BX = BY, we choose the project with the lower
present worth of costs.
• This rule is the same as comparing two mutually-exclusive projects
using the IRR as was presented in Chapter 5. In order to choose a
project, not only the IRR of the individual project, but also the IRR of
the incremental investment must exceed the MARR.
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10.4 Benefit – Cost Ratios (12 of 13)
• CAUTION: There is some ambiguity in how to
correctly calculate BCRs.
• It may not be clear whether certain positive
effects are benefits to the public or reductions in
cost to the government.
• Or … whether certain negative effects are disbenefits to the public or increases in costs to the
government.
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10.4 Benefit – Cost Ratios (13 of 13)
• Differing results means that a comparison of
BCRs across projects may not carry the meaning
intended and may not be consistent or valid.
• Hence, Treasury Board’s (Canada) Benefit–Cost
Analysis Guide recommends the use of PW or
AW for comparisons.
• Despite this recommendation, benefit–cost ratios
are still used extensively for project comparisons.
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10.5 The MARR and the Public Sector
(1 of 5)
• There are significant differences between the private
sector and public sector with respect to investment.
• In public sector organizations resources are
allocated to projects believed to be beneficial to
society, and that might otherwise not be provided, or
whose provision may be subject to market failure.
• Private sector is more concerned with generating
wealth (profits) and are taxed by the government on
this wealth. Public sector projects are not taxed.
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10.5 The MARR and the Public Sector
(2 of 5)
• Based on the above:
– MARR for a public institution is lower than that of a
private institution.
Private institutions have extra expenses acting to
reduce its profits.
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10.5 The MARR and the Public Sector
(3 of 5)
• In evaluating public sector projects, the MARR is
used in the same way as in evaluating private sector
projects—it captures the time value of money.
• In the private sector:
– MARR expresses the minimum rate of return required
on projects, taking into account that profits will be
taxed.
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10.5 The MARR and the Public Sector
(4 of 5)
• MARR used for public projects is referred to as the
social discount rate
– Reflects the general investment goal of maximizing
social benefits.
• Higher discount rates make the future benefits of
public projects less likely to be achieved.
• Smaller discount rates make public projects more
acceptable.
• There is substantial debate concerning what an
appropriate social discount rate should be.
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10.5 The MARR and the Public Sector
(5 of 5)
• One view is that the MARR should be the interest rate on
capital borrowed to fund a project (ie. current bond rates)
• Another view is that the MARR used to evaluate public
projects should take into account that government
spending on public projects consumes capital that might
otherwise be used by taxpayers for private purposes.
This suggests the social discount rate should be same as
the MARR used in evaluating private investment.
• These are considered the lower and upper bounds for the
social discount rate.
• Treasury Board of Canada recommends a range of 3-7%
for projects with a life of more than 30 years, and 8-12%
otherwise.
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W2023 Final Exam Question #1
The city of Toronto is considering an upgrade to its current waterfront development
project. The present equivalent cost of the construction is expected to be $1.2 million.
Construction is expected to last for 5 years. Annual O&M costs are expected to be
approximately $50k per year once the construction is completed. The O&M costs are
expected to continue indefinitely. The project is expected to cause $30,000 per year in
disruption to local businesses and residents during the 5 years of construction but
afterwards, the annual benefit is expected to be $100k per year indefinitely. The MARR
is 6% and the social discount rate is 3%.Find the Benefit-Cost ratio. The answer is wi
thin 0.04 of which of the following?
A) None of the answers are correct.
B) 0.94
C) 1.04
D) 1.14
E) 1.24
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W2023 Final Exam Question #1
The city of Toronto is considering an upgrade to its current waterfront development
project. The present equivalent cost of the construction is expected to be $1.2 million.
Construction is expected to last for 5 years. Annual O&M costs are expected to be
approximately $50k per year once the construction is completed. The O&M costs are
expected to continue indefinitely. The project is expected to cause $30,000 per year in
disruption to local businesses and residents during the 5 years of construction but
afterwards, the annual benefit is expected to be $100k per year indefinitely. The MARR
is 6% and the social discount rate is 3%.Find the Benefit-Cost ratio. The answer is wi
thin 0.04 of which of the following?
A) None of the answers are correct.
B) 0.94
C) 1.04
D) 1.14
E) 1.24
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W2023 Final Exam Question #2
The Engineering department at TMU wants to build a recreation centre for alumni and
students to enjoy. It has narrowed the choices down to tennis courts or a swimming
pool. The swimming pool will cost $2.6 million to construct and will cost $300,000 per
year to operate, but it will bring benefits of $475,000 per year over its 28-year expected
life. Both projects are assumed to have a salvage value of zero. The appropriate
MARR is 7 percent. Find the benefit cost ratio of the swimming pool? The answer is
within 0.05 of which of the following? Choose the best answer.
A) 1.024
B) 0.924
C) 0.824
D) 0.724
E) None of the answers are correct
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W2023 Final Exam Question #2
The Engineering department at TMU wants to build a recreation centre for alumni and
students to enjoy. It has narrowed the choices down to tennis courts or a swimming
pool. The swimming pool will cost $2.6 million to construct and will cost $300,000 per
year to operate, but it will bring benefits of $475,000 per year over its 28-year expected
life. Both projects are assumed to have a salvage value of zero. The appropriate
MARR is 7 percent. Find the benefit cost ratio of the swimming pool? The answer is
within 0.05 of which of the following? Choose the best answer.
A) 1.024
B) 0.924
C) 0.824
D) 0.724
E) None of the answers are correct
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W2023 Final Exam Question #3
The Engineering department at TMU wants to build a recreation centre for alumni
and students to enjoy. It has narrowed the choices down to tennis courts or a
swimming pool. Tennis courts would cost $210,000 to build, cost $21,000 per year
to operate, and bring $63,000 per year in benefits over their nine-year life. Both
projects are assumed to have a salvage value of zero. The appropriate MARR is 7
percent. Find the modified benefits cost ratio of the tennis courts. The answer is
within 0.05 of which of the following? Choose the best answer.
A) 0.9
B) 1.0
C) 1.1
D) 1.2
E) None of the above
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W2023 Final Exam Question #3
The Engineering department at TMU wants to build a recreation centre for alumni and
students to enjoy. It has narrowed the choices down to tennis courts or a swimming
pool. Tennis courts would cost $210,000 to build, cost $21,000 per year to operate,
and bring $63,000 per year in benefits over their nine-year life. Both projects are
assumed to have a salvage value of zero. The appropriate MARR is 7 percent. Find
the modified benefits cost ratio of the tennis courts. The answer is within 0.05 of
which of the following? Choose the best answer.
A) 0.9
B) 1.0
C) 1.1
D) 1.2
E) None of the above
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Summary (1 of 1)
• Why markets may fail to lead to efficient decisions.
• Three formal methods by which society seeks to
remedy market failure.
• Three issues in decision making related to government
production.
– It is more difficult to identify and measure costs and
benefits in the public sector than in the private sector.
– Care must be taken when using benefit-cost ratios
because of ambiguity.
– Use a range of MARRs corresponding to the
opportunity cost of funds used in the public sector.
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W2023 Final Exam Question #1
The city of Toronto is considering an upgrade to its current waterfront development
project. The present equivalent cost of the construction is expected to be $1.2 million.
Construction is expected to last for 5 years. Annual O&M costs are expected to be
approximately $50k per year once the construction is completed. The O&M costs are
expected to continue indefinitely. The project is expected to cause $30,000 per year in
disruption to local businesses and residents during the 5 years of construction but
afterwards, the annual benefit is expected to be $100k per year indefinitely. The MARR
is 6% and the social discount rate is 3%.Find the Benefit-Cost ratio. The answer is wi
thin 0.04 of which of the following?
Solution Method (Ch.10):
B/C = [100k/.03*(P/F,3%,5) – 30k(P/A,3%,5)] / [1.2m + 50k/.03(P/F,3%,5)]
= 1.038
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W2023 Final Exam Question #2
The Engineering department at TMU wants to build a recreation centre for alumni and
students to enjoy. It has narrowed the choices down to tennis courts or a swimming
pool. The swimming pool will cost $2.6 million to construct and will cost $300,000 per
year to operate, but it will bring benefits of $475,000 per year over its 28-year expected
life. Both projects are assumed to have a salvage value of zero. The appropriate
MARR is 7 percent. Find the benefit cost ratio of the swimming pool? The answer is
within 0.05 of which of the following? Choose the best answer.
Solution Method (CH.10):
BCRSP = 475k/ [2.6m(A/P,7%,28) + 300k] = 0.9237
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W2023 Final Exam Question #3
The Engineering department at TMU wants to build a recreation centre for alumni
and students to enjoy. It has narrowed the choices down to tennis courts or a
swimming pool. Tennis courts would cost $210,000 to build, cost $21,000 per year
to operate, and bring $63,000 per year in benefits over their nine-year life. Both
projects are assumed to have a salvage value of zero. The appropriate MARR is 7
percent. Find the modified benefits cost ratio of the tennis courts. The answer is
within 0.05 of which of the following? Choose the best answer.
(MCP 10-33) Solution Method (Ch.10)
MBCRTC = [63k – 21k] / 210k(A/P,7%,9) = 1.3029
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