MODULE No.

8
EVALUATING PROJECTS WITH BENEFIT-COST
RATIO
PROGRAM: BSCPE Year Level: 2ND YEAR Section: CPE 2A/2B/2C

COURSE CODE: BENG01 DESCRIPTION: ENGINEERING ECONOMY

LEARNING OUTCOMES
At the end of the period, the students should be able to:
1. Explain some of the fundamental differences between private
and public sector projects.
2. Explain the major aspects of public project activities, and
describe how ethical compromise may enter public sector project
analysis.
3. Explain service sector projects and use cost effectiveness analysis
(CEA) to evaluate projects.

Prepared: Reviewed and Checked:

RUJEVI S. BADAGUAS ENGR. MARIA THERESA B. PRENDA
Instructor Program Head

Recommending Approval: Approved:

WILMA WENG P. CASALME, PhD PROF. MICHAEL E. LIRIO, CPA, MMPA

Vice President for Academic Affairs College Administrator

EVALUATING PROJECTS WITH BENEFIT-COST RATIO

TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY

 Program: BS COMPUTER ENGINEERING Topic: EVALUATING PROJECTS WITH BENEFIT-COST
RATIO
Course: ENGINEERING ECONOMY Instructor: ENGR. RUJEVI S. BADAGUAS
Code BENG01 Module #: 8 Week #: 16-17 # of Pages: 9

I. Preliminaries
Introduction to the This topic is all about the perspective of analyzing and evaluating public sector
Module Objective projects, determining the government projects, the comparison of public and
private sector projects and the use of benefit-cost ratio method. Also included
here is the advantage and limitations of benefit-cost ratio.
Assessment/
Section Topics Learning Outcomes Evaluation Modality
Section 8.1 Perspective 1. Explain some of the Discussion Power Point
and Terminology for fundamental differences between Presentation
Analyzing Public Projects private and public sector projects. 08 Homework 1 via Moodle

Section 8.2 Benefit-Cost 2. Explain the major aspects of Learning

Ratio Method Journal
public project activities, and
describe how ethical compromise
may enter public sector project
analysis.

3. Explain service sector projects

and use cost effectiveness
analysis (CEA) to evaluate
projects.

II. Instructions
KEYWORDS AND CONCEPTS

Public Sector Projects –These are owned, used and financed by citizens of government units

Public project – a project, in which no members are added

Private project – a project with at least one member that is added

Public-Private Partnership – defined as a contractual agreement between the government and a

private firm targeted towards financing, designing, implementing and operating infrastructure
facilities and services that were traditionally provided by the public sector

Perspective – Maximize the net benefits to the owners of the enterprise considering the project

Project Benefits – The favorable consequences of the project to the public

Project Cost – The monetary disbursements required of the government

Disbenefits – The negative consequences of a project to the public

Benefit/Cost Ratio – the ratio of the equivalent worth of benefits to the equivalent worth of costs

Modified Benefit/Cost Ratio – place any salvage in denominator with only initial investment cost
EVALUATING PROJECTS WITH BENEFIT-COST RATIO

8.1 PERSPECTIVE AND TERMINOLOGY FOR ANALYZING PUBLIC PROJECTS

The feature of projects in the public sector is that their implementation contributes to the growth of
the welfare of society and is a prerequisite for its development. It is worth noting that public sector
projects are often characterized by negative profitability and, therefore, cash flows do not generate
a commercial effect. At the same time, the importance of implementing such projects is to increase
the welfare of society and to promote economic growth, capital accumulation, and increase in the
competitiveness of the national economy.
The benefits that society receives as a result of the implementation of public sector projects, due to
their specificity, cannot be offered on the market and, therefore, market prices are not applied
when evaluating such projects. In addition, during market failures, market prices do not reflect
marginal benefits and costs. The ineffectiveness of the market mechanism for revenue generation
is the reason that complicates the use of classical investment analysis tools to assess the

TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY

 effectiveness of public sector projects.
One problem when analyzing the effectiveness of public sector projects is the need to take into
account the externalities associated with the results or effects of the project being implemented

Public and Private Sector Projects

A project can either be a public or private sector project.

 A public project is a project, in which no members are added.

 A private project is a project with members. To make a project private, you need to add at
least one member to the project.

Difference Between Public And Private Projects

In public projects:

 Any member can log time to a project.

 Logged time is visible to all members of a workspace.

 Regular members can configure the general settings and work types for a project.

In private projects:

 Only the project team can log time.

 Logged time is visible only to the workspace owner, admin, and the assigned project
manager.

 Only the workspace owner and admin can configure settings for a project.
 The assigned project manager can configure project settings except for billing functionality.
Public-Private Partnership

Public-Private Partnership (PPP) can be broadly defined as a contractual agreement between the
Government and a private firm targeted towards financing, designing, implementing and operating
infrastructure facilities and services that were traditionally provided by the public sector. It
embodies optimal risk allocation between the parties – minimizing cost while realizing project
developmental objectives. Thus, the project is to be structured in such a way that the private sector
gets a reasonable rate of return on its investment.

PPP offers monetary and non-monetary advantages for the public sector. It addresses the limited
funding resources for local infrastructure or development projects of the public sector thereby
allowing the allocation of public funds for other local priorities. It is a mechanism to distribute
project risks to both public and private sector. PPP is geared for both sectors to gain improved
efficiency and project implementation processes in delivering services to the public. Most
importantly, PPP emphasizes Value for Money (VfM) – focusing on reduced costs, better risk
allocation, faster implementation, improved services and possible generation of additional revenue.

TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY

 Elements of Public-Private Partnership

 Strategic mode of procurement

 A contractual agreement between the public sector and the private sector
 Shared risks and resources
 Value for Money (VfM)
 Outcome orientation
 Acceleration of infrastructure provision and faster implementation

Eligible Types of PPP Projects

The Revised IRR of the BOT Law enumerates the list of activities which may be undertaken under
any of the recognized and valid BOT contractual arrangements (PPP modalities). These include,
among others:

1. Highways, including expressways, roads, bridges, interchanges, tunnels, and related

facilities;
2. Railways or rail-based projects that may or may not be packaged with commercial
development opportunities;
3. Non-rail based mass transit facilities, navigable inland waterways and related facilities;
4. Port infrastructures like piers, wharves, quays, storage, handling, ferry services and related
facilities;
5. Airports, air navigation, and related facilities;
6. Power generation, transmission, sub-transmission, distribution, and related facilities;
7. Telecommunications, backbone network, terrestrial and satellite facilities and related
service facilities;
8. Information technology (IT) and data base infrastructure, including modernization of IT, geo-
spatial resource mapping and cadastral survey for resource accounting and planning;
9. Irrigation and related facilities;
10. Water supply, sewerage, drainage, and related facilities;
11. Education and health infrastructure;
12. Land reclamation, dredging and other related development facilities;
13. Industrial and tourism estates or townships, including ecotourism projects such as terrestrial
and coastal/marine nature parks, among others and related infrastructure facilities and
utilities;
14. Government buildings, housing projects;
15. Markets, slaughterhouses, and related facilities;
16. Warehouses and post-harvest facilities;
17. Public fishports and fishponds, including storage and processing facilities;
18. Environmental and solid waste management related facilities such as, but not limited to,
collection equipment, composting plants, landfill and tidal barriers, among others; and
19. Climate change mitigation and adaptation infrastructure projects and related facilities.

Advantages of PPP

In general, governments tap public-private partnership (PPP) for the following reasons:
TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY
 1. PPPs encourage the injection of private sector capital.

o National budget and Official Development Assistance (ODA) are limited and are
subject to government prioritization. Private sector funding, on the other hand, is
readily available. It may be tapped to augment ODA funds and the government
budget to implement critical government projects.

o In the case of big ticket infrastructure projects, PPPs utilize the financial capital of the
private sector. Through it, project construction and service delivery is accelerated.
For example, the NAIA Expressway Phase II project will be financed through private
sector funding. On top of this, the government has received an upfront payment of 11
billion pesos even before the actual project construction.

2. PPPs make projects affordable.

o Government spending will be less if the project is undertaken as a PPP, since the
private sector funds their share of the project (including operation and maintenance)
during the duration of the concession. PPP projects consider the whole of life costing
approach (whole lifecycle costing) which ultimately lowers capital and operating
costs.

o All PPP projects undergo a competitive, transparent bidding. PPP project proponents
usually provide the most cost-effective capital goods necessary for the project.

3. PPPs deliver value for money.

o Value for money (VfM) is achieved when the government obtains the maximum benefit
from the goods and services it both acquires and provides. It is the best available
outcome after taking into account all the benefits, costs, and risks over the entire
project life, which may not necessarily be the lowest cost or price.

o For the PPP for School Infrastructure Project (PSIP) Phase 1, the PPP scheme was
identified as the most optimal financing option available for the government to address
the current classroom backlog in the country. Under this scheme, the government will
be able to deliver the needed classrooms in the shortest time possible.

4. In PPPs, each risk is allocated to the party who can best manage or absorb it.

o In PPPs, risks are assumed by the party that is best able to manage and assume the
consequences of the risk involved.

o PPPs enable the government to take on fewer risks due to shared risk allocation.
Generally, the private sector takes on the project’s life cycle cost risk, while the
government assumes site risks, legislative and government policy risks, among others.

5. PPPs force the public sector to focus on outputs and benefits from the start.

o Project preparation activities are more rigorous in public-private partnerships. This

ensures that the project is highly bankable and can stand public scrutiny. Better project
preparation and execution will result in adherence to project design within the agreed
timelines.

o In PPPs, the government focuses on providing quality infrastructure and services by

setting each project’s minimum performance standards and specifications (MPSS).

6. With PPPs, the quality of service has to be maintained for the entire duration of the
cooperation period.

o In PPPs, project execution will be more rigorous as project ownership belongs to the
project proponents. The public sector only pays when services are delivered
satisfactorily.

o During the implementation stage, an independent consultant is hired to ensure that

both public and private parties adhere to the terms of the contract/ concession
agreement. This is true in the case of projects presently undergoing construction—the
PSIP Phase 1 and the Daang Hari- SLEX Link Road project.
TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY
 7. PPPs encourage innovation.

o PPPs maximize the use of private sector skills. It utilizes higher levels of private sector
efficiency, specialization, and technology.

o In the case of the PSIP and the Daang Hari-SLEX Link Road projects, private proponents
were given flexibility in coming up with the project design that is most efficient, taking into
consideration the MPSS set by the government.
Public Sector Projects

 These are owned, used and financed by citizens of government units

 Some examples of public sector projects are:
o Highways
o Universities
o Hospitals
o Sports arenas
o Prisons
o Public housing
 Public projects provide service at no profit

Public Sector Project Characteristics

The table will show the comparison of public sector and private sector projects based on their
characteristics.

Perspective and Terminology for Analyzing Public Projects

Perspective

 Maximize the net benefits to the owners of the enterprise considering the project

Project Benefits

 The favorable consequences of the project to the public

Project Cost

TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY

  The monetary disbursements required of the government

Disbenefits

 The negative consequences of a project to the public

8.2 BENEFIT-COST RATIO METHOD

The benefit-cost ratio (BCR) is a profitability indicator used in cost-benefit analysis to determine
the viability of cash flows generated from an asset or project. The BCR compares the present
value of all benefits generated from a project/asset to the present value of all costs. A BCR
exceeding one indicates that the asset/project is expected to generate incremental value.

Benefit-cost ratio involves the following:

 the ratio of the equivalent worth of benefits to the equivalent worth of costs
 involves the calculation of a ratio of benefits to costs

 if disbenefits are estimated, subtract from benefits

 if D is added to costs in denominator, the benefit/cost value changes, but economic decision
is the same

Although the formula above may appear complicated, the calculation is simply the discounted cash
inflows divided by the discounted cash outflows. The discount rate used refers to the cost of
capital, which can be the company’s required rate of return, the hurdle rate, or the weighted
average cost of capital.

Modified benefit/Cost Ratio

 place any salvage in denominator with only initial investment cost

Advantages of the Benefit-Cost Ratio

Key advantages of the benefit-cost ratio include:

 It is a useful starting point in determining a project’s feasibility and whether it can generate
incremental value.
 If the inputs are known (cash flows, discount rate), the ratio is relatively easy to calculate.
 The ratio considers the time value of money through the discount rate.
 The ratio indicates the value generated per dollar of costs.

Limitations of the Benefit-Cost Ratio

Key limitations of the benefit-cost ratio include:

TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY

  The reliability of the BCR depends heavily on assumptions. Poor cash flow forecasting or an
incorrect discount rate would lead to a flawed ratio.
 The ratio itself does not indicate the project’s size or provide a specific value on what the
asset/project will generate.

Guideline for Economic Justification

 if B/C ≥ 1.0, accept the project

 if B/C < 1.0, reject the project

Example 1 – Analyzing If A Project/Program Is Good or Not

A non-profit educational research organization is contemplating an investment pf Php 1,500,000 in
grants to develop new ways to teach people the rudiments of profession. The grants would extend
over ten-year period and would achieve an estimated savings of Php 500,000 per year in
professor’s salaries, student tuition, and other expenses. The program would be an addition to
ongoing and planned activities, thus an estimated Php 100,000 a year would have to be released
from other program to support the educational research. A rate of return of 15% is expected. Is this
a good program?

III. Viable and vibrant Activities

Description of the Learning Activities

Discussion – the students need to share ideas and knowledge about analyzing projects with
benefit/cost ratio and how it is related to the current situation when it comes to reengineering
government projects and expenditures

08 Homework 1 – the students will do the homework to know their understanding of the lesson
that have been discussed
V. Opportunity to reflect and articulate students’ acquired knowledge.

Criteria for Evaluation

08 HOMEWORK 1 – EVALUATING PROJECTS WITH BENEFIT-COST RATIO (30 POINTS)

Purpose of Activity

Discussion – The students are required to give their opinions and share their knowledge about
the topics being discussed. They also need to analyze the importance of government projects
being constructed in their areas, the benefits and disbenefits that those projects have done to their
TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY
 lives, and relate to real-life situation.

08 Homework 1 – a homework will be given to the students after the discussion to test if they
understand the lesson

Summary and Reflection

After the discussion, the student will write in their learning journal what they have learned in the
lesson being discussed.

I ALREADY I STILL WANT

TOPIC/S I LEARNED…… REFLECTION
KNEW…. TO KNOW…..
Perspective and
Terminology for
Analyzing Public
Projects

Benefit-Cost
Ratio Method

OVERALL
REFLECTION

V. Textbooks and other References

1. R. A. Chadderton, Purposeful Engineering Economics, 1st edition, Springer International

Publishing Switzerland, 2015

2. D. G. Newnan, J. Whittaker, T. G. Eschenbach and J. P. Lavelle, Engineering Economic

Analysis, 3rd edition, Don Mills, Toronto, Ontario, 2014.

3. N. M. Fraser and E. M. Jewkes, Engineering Economics: Financial Decision Making for

Engineers, 5th edition, Pearson, Toronto, Ontario, 2013

4. Atkinson A., Stiglitz J. (1980) Lectures on public economics. NY: McGraw-Hill.

5. Baumol W. (1952) Welfare Economics and the Theory of the State. Cambridge: Harvard
University Press.

6. Belli P., Anderson J., Barnum H., Dixon J., and Tan P. (1996) Handbook on Economic
Analysis of Investment Operations. Processed.

7. Boardman A., Greenberg D., Vining A., Weimer D. (2006) Cost-benefit analysis: concepts
and practice. 3rd ed. Upper Saddle River. N.J.: Prentice Hall.

8. Dasgupta A. K., Pearce D. W. (1978) Cost-Benefit Analysis: Theory and Practice. L.:
Macmillan.

9. Dreze J., Stern B. (1985) The Theory of Cost-Benefit Analysis. Handbook of public
economics / ed. by A. J. Auer Bach, M. Feldstein. NHPC, vol. 1, 2.

TANAUAN CITY COLLEGE BENG01 / MODULE NUMBER 8 ENGINEERING ECONOMY