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CTC 475 Review

CTC 475 Review. Comparing Alternatives Ranking (PW,AW,FW) Incremental (PW,AW,FW,IRR,ERR,SIR) Supplementary Analyses Breakeven, Sensitivity, Probability Selecting and Selling the Project. CTC 475. Projects in the Public Sector. Objectives.

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CTC 475 Review

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  1. CTC 475 Review • Comparing Alternatives • Ranking (PW,AW,FW) • Incremental (PW,AW,FW,IRR,ERR,SIR) • Supplementary Analyses • Breakeven, Sensitivity, Probability • Selecting and Selling the Project

  2. CTC 475 Projects in the Public Sector

  3. Objectives • Understand the major differences between public/private projects • Know the common errors when using B/C ratio

  4. Public Projects • Cultural Development • (education, historic, recreation) • Economic Services • (transportation, power generation) • Natural Resources • (pollution control, flood control, wildlife management) • Protection • (military services, police/fire)

  5. Differences from Private Sector Projects • Big initial cost (millions) • Long lives (>=50 years) • Multiple-use concept (lake—boaters, fishermen, flood control, irrigation, power) • Difficult to define cash flows (recreation, aesthetics, historic, cultural)

  6. Basic Steps for Analysis • Define alternatives • Define planning horizon • Develop cash flow profiles • Specify MARR • Compare alternatives (B/C ratio) • Perform supplementary analyses • Select preferred alternative

  7. B/C • B/C (same as SIR) = PW(+)/PW(-) • B-C (present worth method) Use incremental analysis if using B/C

  8. Example of Defining Alternatives and Developing Cash Flow Profiles Steps 1 and 3 (planning horizon is the same)

  9. Example-Public Project

  10. Explanations • Annual govt. costs includes annualized initial cost and annual O&M costs • Annual public costs are annualized costs for safety, time, and vehicle operation • Note that we don’t need the planning horizon to do our analysis

  11. Compare B & A (B-A) • Incremental benefits • -$13,605,00-(-$16,973,000)=$3,367,800 • Benefit because we’re reducing public costs • Incremental Costs • $1,243,400-$676,800=$566,600 • Incremental B/C • $3,367,800/$566,600=5.9 • Spending the extra money to lower public costs is economically feasible

  12. Compare C & B (C-B) • Incremental benefits • -$12,678,500-(-$13,605,200)=$926,700 • Benefit because we’re reducing public costs • Incremental Costs • $2,102,800-$1,243,400=$859,400 • Incremental B/C • $926,700/$859,400=1.08 • Spending the extra money for Alt. C to lower public costs is economically feasible

  13. Use Ranking (AW)

  14. Considerations • Point of view • Selecting the MARR • Over-counting • Unequal lives • Tolls & fees • Multiple-use Projects • Problems w/ B/C ratio

  15. Point of View • Individual • Particular govt. organization • Local Area • Regional Area • Entire nation

  16. Selecting the MARR • Use zero for tax money • Use society’s time preference rate • Use rate paid by govt. for borrowed money • Opportunity cost for private investors • Opportunity costs foregone by govt. agencies

  17. Overcounting • For public projects it’s easy to count something twice • Calculate wages lost (individual viewpoint) • Put $ on disability accidents (company’s viewpoint)

  18. Unequal Lives • Planning horizon usually coincides with the longest-lived alternative • If shortest life is chosen it is difficult to put a $ value on residual (salvage) value for the projects w/ the longer lives

  19. Tolls, Fees and User Charges • Tolls, fees and user charges impact the B/C ratio (but not B-C)

  20. Fees—Example Problem • On board

  21. Multiple-Use Projects • For incremental costs a public project can be expanded to provide multiple benefits • Each project alone may not have been economically feasible

  22. Multiple-Use • Example problem on board

  23. Problems w/ B/C Ratio • Difficult to determine whether there is a benefit to the public or a cost savings to the government • Also, is it a disbenefit or an actual cost? • Affect’s B/C ratio but not B-C

  24. B/C ratio problems • Example on board

  25. Other Analyses • Money alone is sometimes not the only consideration • Reliability • Performance • Availability • Maintainability

  26. Reliability Example • On-Board

  27. Next lecture • ATCF (After-Tax Cash Flows) • Taxes/Depreciation

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