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The document discusses how to compare alternatives using the benefit-cost ratio method. It provides steps to rank alternatives by their costs, select a base "do nothing" alternative, and calculate the benefit-cost ratio of other alternatives to determine if they should become the new baseline. If an alternative's benefit-cost ratio is greater than or equal to 1, it is considered a better option than the baseline. The document provides examples of applying this method to evaluate potential investment projects.

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Noreen Stella Ebad
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528 views2 pages

Install

The document discusses how to compare alternatives using the benefit-cost ratio method. It provides steps to rank alternatives by their costs, select a base "do nothing" alternative, and calculate the benefit-cost ratio of other alternatives to determine if they should become the new baseline. If an alternative's benefit-cost ratio is greater than or equal to 1, it is considered a better option than the baseline. The document provides examples of applying this method to evaluate potential investment projects.

Uploaded by

Noreen Stella Ebad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as TXT, PDF, TXT or read online on Scribd
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HELLO

Comparing Alternatives by B/C Ratio Method

When comparing mutually exclusive alternatives with the B-C ratio method the
following steps should be considered.
The alternatives are ranked first cost (PW, AW, or FW). The do-nothing
alternative is selected as a base alternative.
The B-C ratio is then calculated for the alternative having the lowest
equivalent cost. It is the greater than or equal to 1.0, then it will be the new
alternative; otherwise, do nothing remains as the base alternative.
3. The next least equivalent cost alternative is then selected and determined
the increment B–C ratio (∆B/∆C) between this alternative and baseline.
If (∆B/∆C) ≥ 1.0, the nest higher equivalent becomes the new baseline;
otherwise the last baseline alternative is maintained.
The increment B-C ratios are determined for each successively higher
equivalent cost alternative until the last alternative has been compared.

Example
A nonprofit educational research organization, is contemplating an investment of
P1,500,000 in grants to develop new ways to teach people the rudiments of
profession. The grants would extend over a ten-year period and would achieve an
estimated savings of P500,000 per year in professors salaries, student tuition, and
other expenses. The program would be an addition to ongoing and planned activities,
thus an estimated P100,000 a year would have to be released from other program to
support the education research a rate of return of 15% is expected is this a good
program?
SOLUTION
BENEFIT = P500,000 per year
DISBENEFIT P100,000 per
COST = P1,500,000 (A/P, 5%,10) = P298,950 per year
B/C = (P500,000-P100,000)/P298,950 = 1.34
The project I justified, since B/C > 1.00.

Example
The national government intends to build a dam and hydroelectric project in the
Cagayan valley t a total cost of 455,500,000. The project will be financed by soft
foreign loan with a rate of interest of 5% per year. The annual cost for operation,
maintenance, distribution facilities and others would total P15,100,000. Annual
revenues and benefits are estimated to be P56,500,000. If the structures are
expected to last for 50 years with no salvage value, determine the B/C ratio of the
project.
SOLUTION
By the equivalent uniform annual cost method
Annual benefit = P56,500,000
= P455,500,000(A/P,5%50)+P15,100,000
= P40,061,400
B/C = P56,500,000/P40,061,400 = 1.410
This is a good project, since B/C > 1.0.
By the present worth cost method
PWBENEFIT = P56,500,000 (P/A,%,50) = P1,031 x 106
PWCOST = P455. X 106 + P15.1 x 106 (P/A,5%,50)
= P731.164 x106
B/C = (P1,031 x 10^6)/(P731.164 x10^6) = 1.41
This is a good project, since B/C >1.0
Alternative comparison by Benefit/cost analysis
In computing the benefit cost ratio by eq(11-1) for a given alternative the
benefits and cost used in the calculation represent the differences between the
alternatives.
Example
The routes are under consideration for a new highway route A would be located about
five miles from central business district and would require longer travel distances
by local commuter traffic. Route B would pass directly through the downtown area
and although its construction would be higher. It would reduce the travel time and
distance for local commuters.
The costs for two routes are as follows.
ROUTE A ROUTE B
INITIAL COST P200,000,000 P250,000,000
Maintenance/ year P700,000 P1,100,000
Road upkeep cost/year 10,000,000 4,000,000

If the roads are assumed to last 30 years w/ no salvage value, which route should
be accepted on the basis of a benefit/cost analysis using an interest rate of 15%.
solution
EUAC = P200,000,000 (A/P,15%,30) + P700,000 = 31.56X10^4
EUAC = P250,000,000 (A/P,15%,30) + P1,100,000 = 39.175x10^4
Incremental annual benefit = 10x10^4 - 4x10^4 = 6x10^4
Incremental annual cost = EUAC - EUAC
= 8.015x10^4
B/C =(6x10^4)/(8.015x10^4)
Route A should be selected for construction.

Example
Four alternatives for providing electric supply to a small town have been
identified with the ff. annual benefits and cost.
Alternative Annual benefits Annual cost
A 1,528,000 780,000
B 1,398,000 664,000
C 960,000 742,000
D 810,000 420,000
Solution
Comparing alternative A with alternative B
B/C A over B = (1,528,000- 1,398,000)/(780,000- 664,000) = 1.12
Comparing alternative A with alternative C
B/C A over C = (1,528,000- 960,000)/(780,000- 742,000) = 14.95
Comparing alternative A with alternative D
B/C A over D = (1,528,000- 810,000)/(780,000- 420,000) = 1.99
Select alternative A.

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