244
Chapter 9
Benefit/Cost Analysis and Public Sector Economics
3. AW of total benefits and an example for city 1 are also determined in $1 million units. AW of benefits 5 revenue 1 initial incentive(AyP,7%,8) 1 property tax reduction 1 sales tax sharing 5 7.0 1 0.25(0.16747) 1 0.025 1 0.31 5 $7.377 ($7,377,000 per year) 4. Since benefits are directly estimated (and no disbenefits are included), determine the overall B/C for each alternative using Equation [9.1]. In the case of city 1, ByC1 5 7.377y6.948 5 1.06 City 2 is eliminated with B/C2 5 0.92; the rest are initially acceptable. 5. The C and B values are the actual estimates for the 1-to-DN comparison. 6. The overall B/C is the same as B/C 5 1.06, using Equation [9.6]. City 1 is economically justified and becomes the defender. 7. Repeat steps 5 and 6. Since city 2 is eliminated, the 3-to-1 comparison results in C 5 8.112 2 6.948 5 1.164 B 5 10.454 2 7.377 5 3.077 ByC 5 3.077y1.164 5 2.64 City 3 is well justified and becomes the defender against city 4. From Table 9–1, B/C 5 0.22 for the 4-to-3 comparison. City 4 falls out easily, and city 3 is the one to recommend to the board. Note that the DN alternative could have been selected had no proposal met the B/C or B/C requirements.
Independent project selection
When two or more independent projects are evaluated using B/C analysis and there is no budget limitation, no incremental comparison is necessary. The only comparison is between each project separately with the do-nothing alternative. The project B/C values are calculated, and those with B/C 1.0 are accepted. This is the same procedure as that used to select from independent projects using the ROR method (Chapter 8). When a budget limitation is imposed, the capital budgeting procedure discussed in Chapter 12 must be applied. When the lives of mutually exclusive alternatives are so long that they can be considered infinite, the capitalized cost is used to calculate the equivalent PW or AW values for costs and benefits. Equation [5.3], A 5 P ( i), is used to determine the equivalent AW values in the incremental B/C analysis. Example 9.7 illustrates this using the progressive example and a spreadsheet.
EXAMPLE 9.7 Water Treatment Facility #3 Case
PE
Land for Water Treatment Facility #3 was initially purchased in the year 2010 for $19.3 million; however, when it was publicized, influential people around Allen spoke strongly against the location. We will call this location 1. Some of the plant design had already been completed when the general manager announced that this site was not the best choice anyway, and that it would be sold and a different, better site (location 2) would be purchased for $28.5 million. This was well over the budget amount of $22.0 million previously set for land acquisition. As it turns out, there was a third site (location 3) available for $35.0 million that was never seriously considered. In his review and after much resistance from Allen Water Utilities staff, the consultant, Joel, received a copy of the estimated costs and benefits for the three plant location options. The revenues, savings, and sale of bulk water rights to other communities are estimated as incre-