Post on 03-Apr-2018
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ByMuhammad Shahid Iqbal
Module No. 13
Evaluation of Public alternatives
Engineering
Economics
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Private Versus Public Projects
PURPOSE
Private Project -- Maximize profit, minimize costs
Public Project -- Offer social benefits at minimum cost(i.e., health, employment ) without profit
CAPITAL SOURCES
Private Project -- Private investors and lenders
Public Project -- Taxation; Private Lenders
FINANCING
Private Project -- Individuals (for sole proprietorships andpartnerships); stocks and corporate bonds (forcorporations)
Public Projects -- Direct taxes, Low, no-interest or private
loans, bonds, subsidies
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MULTIPLE PURPOSES
More frequently for public projects ( i.e., reservoir for: flood control,
power source, irrigation, recreation)
PROJECT LIFE
Private Project -- 5 to 20 years;Public Project -- 20 to 60 years
CAPITAL PROVIDER RELATIONSHIP TO PROJECT
Private Project -- Direct
Public Project -- Indirect or none
NATURE OF BENEFITS
Private Project -- Monetary or near monetary
Public Project -- Non-monetary; difficult to equate to monetary terms
Private Versus Public Projects
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PROJECT BENEFICIARIES
Private Project -- Those undertaking project
Public Project -- General public
CONFLICT OF PURPOSES
More common for public projects (i.e., dam for flood control vsenvironmental preservation)
CONFLICT OF INTERESTS
More common for public projects (i.e., intra-agency conflicts)
POLITICAL INFLUENCE
More common for public projects ( i.e., changing decision makers,pressure groups, financial and residential restrictions)
EFFICIENCY MEASUREMENT
Private Project -- Rate of Return on capital
Public Project -- No direct comparison with private projects
Private Versus Public Projects
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Benefits - The favorable consequences of the project to
the project sponsors (i.e., the public for public projects)
Costs -- Monetary disbursements required (i.e., of the
government for public projects)
Disbenefits -- The negative consequences of the project to
the project sponsors
Benefits, Costs, And Disbenefits
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The benefits may occur at different time periods.
For the purpose of comparison these are converted in tocommon time base.
Present worth
Future worth Annual equivalent
Similarly the costs consists of initial cost and yearly operationand maintenance cost. These are converted to a common time
base as done in the equivalent benefit.
The ratio between equivalent benefit and equivalent cost isknown as the Benefit Cost Ratio
If this ratio is at least one, the public activity is justifiedotherwise it is not justified.
Benefit / Cost Ratio Method
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Conventional Benefit / Cost (B/C) Ratio WithPresent Worth
PW (benefits of the proposed project)
B/C = ---------------------------------------------
PW (total costs of the proposed project)
Bp = Present worth of total benefits
P = Initial Investment
Cp = Present worth of cost of operation & maintenance
Bp
BF
BA
B/C ratio = ---------- = ---------------- = -----------------
P + Cp PF + CF PA + C