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ENGR 3360U Winter 2014 Unit 16: Engineering Economic Analysis in The Public Sector
ENGR 3360U Winter 2014 Unit 16: Engineering Economic Analysis in The Public Sector
Unit 16
Engineering Economic Analysis
in the Public Sector
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-07
Change Record
2014-I-07 Initial Creation
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Course Outline
1.
2.
3.
4.
5.
6.
7.
8.
9.
1-3
Engineering Economics
General Economics
1.
Microeconomics
2.
Macroeconomics
3.
Money and the Bank of
Canada
Engineering Estimation
Interest and Equivalence
Present Worth Analysis
Annual Cash Flow
Rate of Return Analysis
Picking the Best Choice
Other Choosing Techniques
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Viewpoint
Industry viewpoint consists largely of the
counting costs and benefits.
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Viewpoint
Government generally takes the viewpoint
of its constituents.
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Cost of Capital
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Cost of Capital
Government opportunity cost
Taxpayer opportunity cost
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= PW benefits/PW costs
= FW benefits/FW costs
= AW benefits/AW costs
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Example 16-2
Show that the B/C ratio is the same for PW,
FW and AW for this highway project.
First cost
1.5M
Annual Maintenance
65K
Annual Benefits to drivers 225K
SV
300K
Life
30 years
IR
8%
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PW
PWbenefits = 225(P/A, 8%, 30) + 300(P/F, 8%,
30) = 2.563M
PWcosts = 1500K + 65(P/A, 8%, 30) =
2.232M
B/C = 2.563/2.232 = 1.15
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FW
FWbenefits = 225(F/A, 8%, 30) + 300 =
25.790M
FWcosts = 1500(F/P, 8%, 30) + 65(F/A, 8%,
30) = 22.460M
B/C = 25.790/22.460 = 1.15
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AW
AWbenefits = 225 + 300(F/A, 8%, 30) = 227.6
AWcosts = 1500(A/P, 8%, 30) + 65= 198.2
B/C = 227.6/198.2 = 1.1
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Quantifying Effects
Many projects have difficulty quantifying
benefits.
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Project Politics
Political influences have an impact on
public projects.
Competing views and political support
Controversy
Long term projects versus short term
politicians
The role of politics is far-reaching in public
projects, as opposed to in industry projects.
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Summary
Governments projects try to maximize benefits to
the public, while minimizing the disbenefits to the
public.
Legislative restrictions
Tend to be larger and affect more people and
groups
Interest rates in the public projects are more
complicated to determine or are legislated.
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Summary, contd.
Benefitscost ratio is a widely used method to
evaluate and justify government-funded projects.
For considering mutually exclusive alternatives,
incremental B/C analysis is used.
Two types of B/C ratios:
Conventional B/C ratio: operating and
maintenance cost in the denominator
Modified B/C ratio: operating and maintenance
cost in the numerator
Both provide identical recommendations.
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