Benefit Cost Analysis
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Typically used for public projects
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The goal is to determine if benefits exceed
costs:
Benefit / Cost Ratio > 1
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The goal is NOT to maximize B/C Ratio.
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Interest rates used are typically lower than
those used by businesses.
• Typically 4% - 8% (6.5% is typical)
• OMB requires 10% (except water proj.)
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Benefit Cost Analysis
The challenge is to quantify the
benefits and costs.
The equation…
B/C = (Benefits – Disbenefits) to the public
(Costs) to sponsoring agency
You can use NPW, EAW, even NFW
– whichever is easier in a particular problem
– Hint: Choose EAW or Capitalized Cost to avoid
equal lifetime issues!
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Benefit Cost Analysis
Steps:
1. Define the planning horizon.
2. Specify the Discount Rate (MARR) to be used.
3. Develop the cost and benefit-disbenefit profiles in
monetary terms.
4. Compare the benefits to costs using a specified
measure of worth, such as annual equivalent or
present worth.
5. If the B/C ratio is:
>1
project is justified
=1
barely justified – political
<1
not justified
6. Repeat steps 3 – 5 for alternative viewpoints
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Cost-Benefit Profiles
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Primary Benefits – (Users) measurable:
• Prevention of costs / savings from
implementation
• Time savings from implementation
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Secondary Benefits – (Users) difficult to measure:
• Environment conservation / improvement
• Pain & suffering avoidance
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Disbenefits – (Users) quantified:
• Time lost due to requirements
• User fees for Operation & Maintenance
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Costs – (Sponsor):
• First costs & Salvage
• Sponsor Operation & Maintenance (– Revenue)
• Operation fees paid by users (+ Revenue)
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Quantification Examples
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Benefits due to reduction in deaths:
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Benefits due to reduction in property damage:
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Average number of users
Average fee charged
Disbenefits due to delay time:
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Number of incidents
Average property damage per incident
Disbenefits due to user fees:
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Number of deaths avoided
Average income stream of victims
Number affected
Average delay duration
Average wage rate of patrons
Costs (+ Revenues due to user fees):
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Average number of users
Average fee charged
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Vehicle Inspection Program Ex.
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State inspects motor vehicles as part of licensing
system. Vehicles not passing inspection must be
repaired prior to license renewal.
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Primary Benefits (Users):
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Secondary Benefits (Users):
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Reduction in deaths due to accidents
Reduction in property damage due to accidents
Pollution avoidance costs
Savings to accident victims families
Avoidance of pain & suffering
Disbenefits (Users):
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Cost of inspection fees
Opportunity cost of time to bring car to inspection
Opportunity cost of time waiting for inspection
Vehicle usage costs for inspection process
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Vehicle Inspection Program Ex.
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Sponsor Costs (State):
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Sponsor Revenues (State):
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Capital recovery costs of inspection facilities
Operating costs of inspectors & admin. staff
Inspection revenues (user fees)
Quantifying Benefits:
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Deaths avoided
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304 victims of fatal accidents avoided
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Income stream lost: $571 106 per victim
Property damage avoided
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37 910 total accidents avoided annually
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63% of accidents are property only
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Average property damage: $1 845 per accident
Total Benefits to Users: $217 680 913 / year
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Vehicle Inspection Program Ex.
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Quantifying Disbenefits:
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Cost of inspection fees
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5 136 224 vehicles inspected annually
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$5 fee per inspection
Opportunity cost of time to bring vehicle to inspection
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5 136 224 vehicles inspected annually
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1.02 hours of inspection travel per car (round trip)
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Average wage rate: $14.02 per hour
Opportunity cost of time waiting for inspection
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Average waiting time: 9 minutes (0.15 hr)
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5 136 224 vehicles inspected annually
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Average wage rate: $14.02 per hour
Vehicle usage costs for inspection process
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5 136 224 vehicles inspected annually
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Operating cost per mile: $0.35
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Average round trip to station: 20 miles
Total Disbenefits to Users:
$145 886 225 / year
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Vehicle Inspection Program Ex.
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Quantifying Sponsor Costs:
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Capital recovery of facilities costs
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Similar facilities annual cost: $46 376 703 per yr
Operating costs for inspectors & admin
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Annual operating costs:
$10 665 600 per year
Revenue from inspection fees
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5 136 224 vehicles inspected annually
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$5 fee per inspection
Total Costs to Sponsor: $31 361 083 / year
IS IT WORTH IT?
B/C = B – D = 217 680 913 – 145 886 165 = 2.29
C
31 361 183
Economically Justified, Politically …
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