Presentation Transcript
Slide 1:Examples on the benefit-cost analysis
Example :Example The Ministry of Transportation is considering the construction of a two-lane road connecting Dammam with Dhahran to easy the congestion and until time the planned highway is built after 5 years.
The benefits and the costs in million riyals associated with the road are
Slide 3:Is the road construction justifiable under the benefit-cost ratio when the social discount rate is 10%?
The present worths are
B = 20 (P/F, 10%, 2) + 30 (P/F, 10%, 3) + 30 (P/F, 10%, 4) + 20 (P/F, 10%, 5) = 71.98 million riyals
I = 10 + 10 (P/F, 10%, 1) = 19.09 million riyalsC' = 5 (P/F, 10%, 2) + 5 (P/F, 10%, 3) + 8 (P/F, 10%, 4) + 8 (P/F, 10%, 5)
= 18.32 million riyals
Slide 4:The BC ratio is
Since BC > 1, the project is accepted.
Example :Example Consider the three projects being considered by the Ministry of Education:
The funds for the selected project will come from a loan the ministry will take from the National Commercial Bank at an interest rate of 10% compounded annually.
Which project should be selected based on the BC criterion?
Slide 6:First, any project whose BC < 1 is removed:
All projects enter the qualification round.
First, projects are ranked in an increasing order of I + C':
Slide 7:Compare A1 and A3:
Since BC of the incremental project is > 1, select project A3.
Slide 8:Compare A3 and A2:
Since BC of the incremental project is > 1, select project A2.