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Unit 7: The Benefit-Cost Ratio Method: This Learning Unit Is Based On Chapter 10 of The Prescribed Book

This unit covers the benefit-cost ratio method for evaluating public projects. [1] It defines key terms like public projects, project benefits, and self-liquidating projects. [2] The unit works through examples of calculating the present value of costs and benefits for a conventional center and sport complex project using discount rates. [3] It shows how to calculate the benefit-cost ratio and determines if a project is worthwhile based on if the ratio is greater than one.

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36 views

Unit 7: The Benefit-Cost Ratio Method: This Learning Unit Is Based On Chapter 10 of The Prescribed Book

This unit covers the benefit-cost ratio method for evaluating public projects. [1] It defines key terms like public projects, project benefits, and self-liquidating projects. [2] The unit works through examples of calculating the present value of costs and benefits for a conventional center and sport complex project using discount rates. [3] It shows how to calculate the benefit-cost ratio and determines if a project is worthwhile based on if the ratio is greater than one.

Uploaded by

Co-leigh Corner
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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EEC3701 – Unit 7

Unit 7: The benefit-cost ratio method

7. Overview

This learning unit is based on chapter 10 of the prescribed book.

7.1 Essential theory and calculations in the prescribed book

Chapter _ Essential theory and calculations in the prescribed book


Pages
(SWK: 468) Definition of public project

(SWK: 468) Differentiate between private and publicly owned projects

(SWK: 469) Definition of project benefit

(SWK: 469-470) Read through example 10-1 – “Benefits and costs of a conventional centre
and sport complex”

(SWK: 470) Definition of a self-liquidating project


(SWK: 470-472) Read through section 10.4 – “Multi-purpose projects”

(SWK: 473) Read through section 10.5 – “Difficulties in evaluating public-sector projects”
(SWK: 474-475) Read through section 10.6 about the different arguments related to the
interest rate that should be used to valuate public projects

(SWK: 476-477) Read through section 10.7, The Benefit-Cost ratio method

(SWK: 477-479) Work through example 10-2

Conventional B-C
Total annual benefits = $490 000 [1 000 x (325 + 65 + 50 + 50)]
Once-off costs at the beginning of the project = 1 000 x (350 + 600 + 250) =
$1 200 000
Annual, recurring costs = $1 000 x (22,5 + 75 + 100) = $197 500
The annual costs, stretching over a period of 20 years must be discounted at
the MARR of 10%

1
EEC3701 – Unit 7

Figure 7.1. Timeline of costs and benefits

It is assumed that the once-off costs are incurred at the beginning of the
project – it is therefore already at year 0 and does not have to be
discounted

The next step is to discount all annual costs and benefits to year 0 (the
beginning of this project) so that it can be compared at the same point in time
Present value of costs (in thousands) = 1 200 + 197,5 x PVIFA( n = 20; I =
10%)
PV (or present worth) of costs (in thousands) = 1 200 + 197,5 x

 (1 + r )n - 1 
 n 
 i(1 + r ) 
 (1 + 0,1 )20 - 1 
PV of costs (in thousands) = 1 200 + 197,5 x  20 
 0,1(1 + 0,1 ) 
PV of costs = (1 200 + 197,5 x 8,5135) x 1 000 = $2 881 429

Present value of benefits (in thousands) = 490 x PVIFA( n = 20; I = 10%)

 (1 + r )n - 1 
PV (or present worth) of costs (in thousands) = 490 x  n 
 i(1 + r ) 
 (1 + 0,1 )20 - 1 
PV of benefits (in thousands) = 490 x  20 
 0,1(1 + 0,1 ) 
PV of benefits = (490 x 8,5135) x 1 000 = $4 171 646

B-C ratio = 4 171 646/2 881 429 = 1,448


Work through example 10-3

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EEC3701 – Unit 7

You have now studied all 7 units of this module.

Preparing for the examination

Revision

It is impossible to master the study material by studying it only once. You should allow enough
time for revision and examination preparation. By revising the subject matter, it will really
become part of your thinking.

CONCLUSION

I would like to take this opportunity to remind you that this document was current at the time of
going to print. However, it is possible that changes may have occurred on the myUnisa module
site and I therefore encourage you to access myUnisa as often as possible.

Please do not hesitate to contact me if you are experiencing problems with the content of this
document or any aspect of the module.

I wish you a fascinating and enjoyable journey through the learning material and trust that you
will complete the module successfully.

Kind regards

Wilhelm (Willie) P. Nel

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