1 Benefit Cost Analysis Typically used for public projects The goal is to determine if benefits exceed costs: Benefit / Cost Ratio > 1 The goal is NOT to maximize B/C Ratio. Interest rates used are typically lower than those used by businesses. Typically 4% - 8% (6.5% is typical) OMB requires 10% (except water proj.)

2 Benefit Cost Analysis The challenge is to quantify the benefits and costs. The equation… B/C = (Benefits – Disbenefits) to the public (Costs) to sponsoring agency You can use NPW, EAW, even NFW – whichever is easier in a particular problem – Hint: Choose EAW or Capitalized Cost to avoid equal lifetime issues!

3 Benefit Cost Analysis Steps: 1. Define the planning horizon. 2. Specify the Discount Rate (MARR) to be used. 3. Develop the cost and benefit-disbenefit profiles in monetary terms. 4. Compare the benefits to costs using a specified measure of worth, such as annual equivalent or present worth. 5. If the B/C ratio is: > 1project is justified = 1barely justified – political < 1not justified 6. Repeat steps 3 – 5 for alternative viewpoints

4 Cost-Benefit Profiles Primary Benefits – (Users) measurable: Prevention of costs / savings from implementation Time savings from implementation Secondary Benefits – (Users) difficult to measure: Environment conservation / improvement Pain & suffering avoidance Disbenefits – (Users) quantified: Time lost due to requirements User fees for Operation & Maintenance Costs – (Sponsor): First costs & Salvage Sponsor Operation & Maintenance (– Revenue) Operation fees paid by users (+ Revenue)

5 Quantification Examples Benefits due to reduction in deaths: Number of deaths avoided Average income stream of victims Benefits due to reduction in property damage: Number of incidents Average property damage per incident Disbenefits due to user fees: Average number of users Average fee charged Disbenefits due to delay time: Number affected Average delay duration Average wage rate of patrons Costs (+ Revenues due to user fees): Average number of users Average fee charged

6 Vehicle Inspection Program Ex. State inspects motor vehicles as part of licensing system. Vehicles not passing inspection must be repaired prior to license renewal. Primary Benefits (Users): Reduction in deaths due to accidents Reduction in property damage due to accidents Secondary Benefits (Users): Pollution avoidance costs Savings to accident victims families Avoidance of pain & suffering Disbenefits (Users): Cost of inspection fees Opportunity cost of time to bring car to inspection Opportunity cost of time waiting for inspection Vehicle usage costs for inspection process

7 Vehicle Inspection Program Ex. Sponsor Costs (State): Capital recovery costs of inspection facilities Operating costs of inspectors & admin. staff Sponsor Revenues (State): Inspection revenues (user fees) Quantifying Benefits: Deaths avoided 304 victims of fatal accidents avoided Income stream lost: $ per victim Property damage avoided total accidents avoided annually 63% of accidents are property only Average property damage: $1 845 per accident Total Benefits to Users:$ / year

8 Vehicle Inspection Program Ex. Quantifying Disbenefits: Cost of inspection fees vehicles inspected annually $5 fee per inspection Opportunity cost of time to bring vehicle to inspection vehicles inspected annually 1.02 hours of inspection travel per car (round trip) Average wage rate: $14.02 per hour Opportunity cost of time waiting for inspection Average waiting time: 9 minutes (0.15 hr) vehicles inspected annually Average wage rate: $14.02 per hour Vehicle usage costs for inspection process vehicles inspected annually Operating cost per mile: $0.35 Average round trip to station: 20 miles Total Disbenefits to Users:$ / year

9 Vehicle Inspection Program Ex. Quantifying Sponsor Costs: Capital recovery of facilities costs Similar facilities annual cost: $ per yr Operating costs for inspectors & admin Annual operating costs:$ per year Revenue from inspection fees vehicles inspected annually $5 fee per inspection Total Costs to Sponsor:$ / year IS IT WORTH IT? B/C = B – D = – = 2.29 C Economically Justified, Politically …