40 benefit cost ratio

Module 8: Benefit-Cost Ratio : 

Module 8: Benefit-Cost Ratio

Outline Module 8 : 

Outline Module 8 Benefit – Cost Ratio 8-2 SI-4251 Ekonomi Teknik

The Benefit – Cost Analysis : 

The Benefit – Cost Analysis The most commonly used method for comparing economic alternatives. This method is often considered as “supplementary” to present worth analysis. The objective is to determine whether the benefit (gained) in return to any cost (spent) is favorable. Basically it is desired that we will gain more than we have spent. Benefit – Cost > 0  B/C > 1.0 8-3 SI-4251 Ekonomi Teknik

Classification : 

Classification Benefit (B)  all favorable return/gain or advantages Disbenefit (D) negative benefit, any negative (loss) result Cost (C)  all things that one pays/expends in order to have return Benefit  income from an investment, e.g., interest Disbenefit  loss of value or (initial) income due to an investment Cost  expenditure 8-4 SI-4251 Ekonomi Teknik

B/C Analysis for A Single Project : 

B/C Analysis for A Single Project Conventional B/C Modified B/C - includes operation & maintenance cost - initial investment replaces cost as denominator 8-5 SI-4251 Ekonomi Teknik Calculation can be made in present worth, future worth or annuity

B - C Analysis for A Single Project : 

B - C Analysis for A Single Project Conventional B-C Modified B-C - includes operation & maintenance cost 8-6 SI-4251 Ekonomi Teknik Calculation can be made in present worth, future worth or annuity

Exercise : 

Exercise A new machine having an initial investment of Rp 225 million and additional Rp 35 million a year for maintenance and operation cost, is estimated to generate Rp 95 million per year in revenue. On the other hand, installation of this new machine will cost the company to lose Rp 3.2 million per year from selling by product. The machine can latter be sold for Rp 75 million at the end of 5 year and the rate of return is set at 8%. Do the benefit cost analysis. Muhamad Abduh, Ph.D. 8-7 SI-4251 Ekonomi Teknik Conventional method: Cost C1 = Rp 225 million  Cost C2 = Rp 35 million/year  Benefit B1 = Rp 95 million/year  Benefit B2 = Rp 75 million at end of 5 year  Disbenefit D = Rp 3.2 million/year  225 (A/P, 8, 5) = 56.3535 35 = 35 95 = 95 75 (A/F, 8, 5) = 12.7845 3 2 = 3.2 B/C = [(95 + 12.7845) – 3.2 - 35]/(56.3535) = 1.2348 B - C = [(95 + 12.7845) – 3.2 - 35] – [56.3535] = Rp 13.231 million (A/P, 8, 5) = 0.25046 (A/F, 8, 5) = 0.17046

Exercise : 

Exercise A new machine having an initial investment of Rp 225 million and additional Rp 35 million a year for maintenance and operation cost, is estimated to generate Rp 95 million per year in revenue. On the other hand, installation of this new machine will cost the company to lose Rp 3.2 million per year from selling by product. The machine can latter be sold for Rp 75 million at the end of 5 year and the rate of return is set at 8%. Do the benefit cost analysis. 8-8 SI-4251 Ekonomi Teknik Modified method: Cost C1 = Rp 725 million  Cost C2 = Rp 35 million/year  Benefit B1 = Rp 95 million/year  Benefit B2 = Rp 75 million at end of 5 year  Disbenefit D = Rp 3.2 million/year  225 (A/P, 8, 5) = 56.3535 35 = 35 95 = 95 75 (A/F, 8, 5) = 12.7845 3 2 = 3.2 (A/P, 8, 5) = 0.25046 (A/F, 8, 5) = 0.17046 B/C = [(95 + 12.7845) – 3.2]/(56.3535 + 35) = 1.1448 B - C = [(95 + 12.7845) – 3.2] – [56.3535 + 35] = Rp 13.231 million

Comparing two alternatives using B/C analysis : 

Comparing two alternatives using B/C analysis 8-9 SI-4251 Ekonomi Teknik COST: EUAWA = 1,250 (A/P, 10, 20) + 27.50 = 1,250 (0.1175) + 27.50 = 174.375 million EUAWB = 3,500 (A/P, 10, 20) + 55.00 = 3,500 (0.1175) + 55.00 = 466.250 million Δ Cost = EUAWB – EUAWA = 466.250 – 174.375 = 291.875 million BENEFIT: EUAWA = 425 million EUAWB = 350 million Δ Benefit = 425-350 = 75 million B/C = 75/291.875 = 0. 2570 B-C = 75 – 291.875 = -216.875

Selection form Mutually Exclusive Alternatives : 

Selection form Mutually Exclusive Alternatives Incremental B/C Analysis 8-10 SI-4251 Ekonomi Teknik

Selection form Mutually Exclusive Alternatives (benar) : 

Selection form Mutually Exclusive Alternatives (benar) Incremental B/C Analysis 8-11 SI-4251 Ekonomi Teknik

Selection form Mutually Exclusive Alternatives (benar) : 

Selection form Mutually Exclusive Alternatives (benar) Incremental B/C Analysis 8-12 SI-4251 Ekonomi Teknik

Homework #8 : 

Homework #8 A ready-mix concrete producer is considering to install a new mixer system: at rate of return 10% determine which system should be installed using B/C analysis? 8-13 SI-4251 Ekonomi Teknik