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Benefit Cost Analysis

This document discusses benefit-cost analysis (BCA) and presents examples of evaluating project alternatives using net present value (NPV). It defines BCA, outlines the steps which include identifying alternatives and their costs and benefits, performing a cost-benefit analysis to compare alternatives. Example calculations are shown to illustrate determining the NPV of alternatives to select the most profitable option. The document also provides an example project comparing two road construction alternatives using their construction and maintenance costs over 20 years, discounted at 8%, to recommend the less expensive alternative.

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105 views20 pages

Benefit Cost Analysis

This document discusses benefit-cost analysis (BCA) and presents examples of evaluating project alternatives using net present value (NPV). It defines BCA, outlines the steps which include identifying alternatives and their costs and benefits, performing a cost-benefit analysis to compare alternatives. Example calculations are shown to illustrate determining the NPV of alternatives to select the most profitable option. The document also provides an example project comparing two road construction alternatives using their construction and maintenance costs over 20 years, discounted at 8%, to recommend the less expensive alternative.

Uploaded by

raz
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BENEFIT COST

ANALYSIS

CEPB323 PROJECT MANAGEMENT &


CONSTRUCTION
MR MOHD ZAKWAN RAMLI
Determine Cost and
Define design
alternatives to
Objective
achieve the analysis for
objective every
alternatives

Economical
Detail
analysis – Determine
evaluation to
compare all benefits for
decide the
alternatives in every
optimum
terms of cost & alternatives
alternative
benefits
i

i = interest rate
NET PRESENT VALUE (NPV)
• Net present value (NPV) is a popular measure of profitability used
in corporate budgeting to assess a given project's potential return
on investment. Because of the time value of the money, NPV takes
into account the compounding of the discount rate over the duration
of the project.
• It also can be defined as the sum of the present values (PVs) of
incoming and outgoing cash flows over a period of time. Incoming
and outgoing cash flows can also be described as benefit and cost
cash flows, respectively.

• NPV = PV(benefits) – PV(costs)


• NPV = -PV(costs) + PV(benefits)
• If NPV > 0, therefore the project is profitable
• If NPV < 0, therefore the project will not be profitable
B1  C1 B2  C2 Bn  Cn
NPV    ... 
1  r  1  r 
1 2
1  r n

Bi Ci
Benefit, B =  Cost, C =   Ca
1  r i
1  r i

 1  (1  r )  n 
PV(cost) = X  C ji 1  r    Z 1  r n
i
 Ca 
 r 

X = initial cost, Cij = future cost, Ca = annual cost, B = benefit, C = cost


n = no of years, r = interest rate, P = present value, F = future value
A = annuity, Z = benefit
EXAMPLE 1
The investment of a project having initial capital of RM
100,000.00 will be giving a profitability of RM 150,000.00
after 5 years. If an alternative, the money is to be saving
and with 5% interest a year (each year compound), is there
the investment give more profitable than the project?

Solution:
P = RM 100,000 n = 5 years r = 5%
F = RM 150,000

Net Present Value (NPV) = 150000 (1+ 0.05)-5


= RM 117,528.93
NPV = RM117,528.93 – RM 100,000 = RM 17,528.93
NPV > 0, The investment of RM 100,000 is profitable.
EXAMPLE 2
An engineering company planned to replace a part of
construction equipment of the company within 3 years with
purchasing new equipment and cost of the equipment is
expected worth at RM 350,000.00. In order to support the
purchasing cost of new equipment, the company made up
a plan to get some amount of money by saving the money
every 3 years in a bank account by having an interest rate
of 7% compounding each years. Now, how much the
amount of the saving?
Solution:

Given:- F = RM 350,000.00, r = 7%, n=3


Annuity, A = ?

A r r
  AF
F (1  r )  1
n
(1  r ) n  1
r  0.07 
A = F = 350,000
(1  r ) n  1 
 (1  0.07 ) 3
 1 

= 350,000 (0.31105)
= RM 108,868.08
EXAMPLE 3
An alternative of two type of pavement been developed by IKRAM
for road construction purpose along 60 kilometer in rural area by
year 2008. Table 1 shows the comparison cost of the road involving
the construction cost and maintenance cost. Level of service for
both roads is in the same level and selection of project is
depending on economical analysis only. The rate of interest is 8%
and analysis period is 20 years. Determine for the best alternative.
Table 1 : An Alternative of Construction and Maintenance Costs
Alternative A Alternative B
Initial construction
RM 250,000 per km RM 180,000 per km
costs (year 0)
Annually
RM 1500 per km/year RM 2500 per km/year
maintenance costs
Once-only
Maintenance after 10 _ RM 50,000 per km
years
Solution:
Alternative A:
X = RM 250,000.00 Cji = 0, z = 0
Ca = RM 1500 per km/year
n = 20, r = 8%

 1  (1  r )  n 
X  C ji 1  r    Z 1  r  n
i
PV(Cost) =  Ca 
 r 
 1  1  0.0820 
= 250,000 + 1500  
 0.08 
 

= RM 264,727.22 per km.


Alternative B:
X = RM 180,000 Cji = RM 50,000 per km – 10 years
Ca = RM 2500 per km/years
n = 20, r = 8%

 1  (1  r )  n 
X  C ji 1  r    Z 1  r  n
i
PV(Cost) =  Ca 
 r 
 1  1  0.0820 
= 180,000 + 50,000 (1+0.08)-10 + 2,500  

 0.08 

= RM 227,705.04 per km.

The alternative A is more expensive than alternative B.


Table 2: Activities, dependencies, and durations

Alternative A Alternative B

Immediate Duration Immediate Duration


Activity Activity
Predecessor (months) Predecessor (months)
A None 6
A None 4
B A 8
B A 4
C B, E 8
C A 6
D C 8 D B 4
E A 8 E A 12
F E 10 F C 8
G A 10 G E 4
H G 8 H A, D, E 12
I E, F, H 6 I F, G 8
J C, D, I 4 J E, H, I 4
Alternative A

6 B 14 14 C 22 22 D 30
6 8 14 14 8 22 22 8 30

0 A 6 6 E 14 14 F 24 30 J 34
0 6 6 6 8 14 14 10 24 30 4 34

6 G 16 16 H 24 24 I 30
6 10 16 16 8 24 24 6 30

Alternative B
12 D 16
3 4
8 B 12 8 4 12 16 H 28
4 4 8 16 12 28

0 A 4 4 E 16 28 J 32
1 2 5 8 9
0 4 4 4 12 16 28 4 32
16 G 20
16 4 20
6 C 12 20 I 28
4 6 10 12 F 20 20 8 28
6 7
10 8 18
Based on CBA, alternative A is more expensive than
alternative B.

Based on network diagram (CPM) analysis, alternative B has


shorter period than alternative A.

Due to both reasons, it is recommended to choose


alternative B for this project.

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