Deck 7: Rate of Return Analysis: Single Alternative

Question 1

What is the primary purpose of public sector projects?

Answer 1

All the projects may be either private sector projects or public sector projects.However, it is their purposes, which make the differences between these two.
The ownership of public sector projects lie with the citizen of the city, state, country or the specified municipal area.This makes a vital difference with private sector projects, where ownership is retained by private body or individuals.
The primary purpose of a public sector project is to make available services to the citizen of those constituencies at no profit.Its main purpose is to help the citizen or perform social works.Such type of projects mainly runs in areas of health, social welfare, economic welfare, various utilities services and many others.
The purpose working behind public sector project is not to earn profits, as the owners and users are the citizen.

Question 2

Identify the following as primarily public or private sector undertakings: eBay, farmer's market, state police department, car racing facility, social security, EMS, ATM, travel agency, amusement park, gambling casino, and swap meet.

Answer 2

The difference between public sector undertakings and private sector undertakings are evaluated on the basis of ownership, users, size of investments, finance raised, applicable interest rates, selection criteria etc.Identification of various projects can be made by evaluating on these parameters.
Owners and users are the citizen of the country in case of public sector undertakings, while private bodies, partnerships and individuals are the owners in case of private sector undertakings.
Public sector undertaking is formed with an intention to run for infinite period or very large period, while life of private sector undertaking is limited and shorter.
The source of finance for public sector is mainly taxation or borrowing from citizen, while for private sector undertakings, it is stocks and loan from markets.
While private sector undertakings are primarily economic oriented with an intention to earn profit, multiple criteria are evaluated in public sector undertakings.
Basis, above differences, eBay, Car racing facility, EMS, ATM, travel agency, gambling casino and swap meet are the private sector undertakings.
Farmer's market, state police department, social security, and amusement park are the public sector undertakings.

Question 3

State whether the following characteristics are primarily associated with public or private sector projects: Large initial investment, short life projects, profit, disbenefits, tax-free bonds, subsidized loans, low interest rate, income tax, and water quality regulations.

Answer 3

Public sector undertakings and private sector undertakings are recognized basis characteristics within it.Parameters of investment, life of project, source of financing and cost attached to the finance are some of the characteristics, over which differences can be make out.
Large initial investments are related with public sector undertakings, while most of the private sector undertakings are having medium to small investment.
Short life projects are associated with the private sector undertakings, while public sector undertakings tend to have much longer life time, considered as having infinite period.
Profits are the characteristics of private sector undertakings, while public sector projects run with no profit concept, as public sector undertakings are owned and used by the citizen.
Disbenefits are related with public sector undertakings, as projects for some group of people must be dis-benefited other group, while owners are all the taxpayers.
Tax free bonds are source of raising funds for public sector projects, since this cost lesser in comparison to borrowing from the markets as in the case of private sector undertakings.
Subsidized loans and low interest rates are characteristics of public sector undertakings so that costing of the project should be on lower side.
Income tax is the source of funding for public sector undertakings, as they are collected from the citizen for the purpose of their use only.
Water quality regulation is characteristics of social welfare projects, which are public sector undertakings.

Question 4

What is the difference between disbenefits and costs?

Question 5

Identify the following cash flows as a benefit, dis- benefit, or cost.
a.$00,000 annual income to local businesses because of tourism created by a national park.
b.Cost of fish from a hatchery to stock the lake at a state park.
c.Less tire wear because of smoother road surfaces.
d.Decrease in property values due to closure of a government research lab.
e.School overcrowding because of military base expansion.
f.Revenue to local motels because of an extended national park season.

Question 6

What is meant by a BOT project?

Question 7

In taking the broadest viewpoint for benefits and disbenefits, state why they might exactly offset each other.

Question 8

Where is the salvage value placed in a conventional B/C ratio? Why?

Question 9

What is the difference between a conventional and a modified B/C analysis?

Question 10

A public water utility spent $2 million to build a treatment plant to remove certain heavy metals from well water.The plant's operating cost is $.1 million per year.Public health benefits are expected to be $85,000 per year.What is the B/C ratio, if the plant is amortized over a 40-year period at 6% per year interest?

Question 11

Calculate the conventional B/C ratio for the cash flow estimates shown at a discount rate of 8% per year.

Question 12

On-site granular ferric hydroxide (GFH) systems can be used to remove arsenic from water when daily flow rates are relatively low.If the operating cost is $00,000 per year, what would the initial investment cost of the GFH system have to be in order to get a B/C ratio of 1.0? Public health benefits are estimated at $00,000 per year.Assume the equipment life is 10 years and the interest rate is 6% per year.

Question 13

The cash flows associated with a Bexar County Arroyo improvement project are as follows: initial cost $50,000; life 20 years; maintenance cost $50,000 per year; benefits $00,000 per year; disbenefits $90,000 per year.Determine the conventional B/C ratio at an interest rate of 6% per year.

Question 14

The Parks and Recreation Department of Burkett County estimates that the initial cost of a "bare- bones" permanent river park will be $.3 million.Annual upkeep costs are estimated at $20,000.Benefits of $40,000 per year and disbenefits of $0,000 per year have also been identified.Using a discount rate of 6% per year, calculate ( a ) the conventional B/C ratio and ( b ) the modified B/C ratio.

Question 15

From the following data, calculate the ( a ) conventional and ( b ) modified benefit/cost ratios using an interest rate of 6% per year and a study period of 40 years.

Question 16

From the following data, calculate the ( a ) conventional and ( b ) modified benefit/cost ratios using an interest rate of 6% per year and an infinite project period.

Question 17

When red light cameras are installed at high-risk intersections, rear-end collisions go up, but all other types of accidents go down, including those involving pedestrians.Analysis of traffic accidents in a northwestern city revealed that the total number of collisions at photo-enhanced intersections decreased from 33 per month to 18.At the same time, the number of traffic tickets issued for red light violations averaged 1100 per month, at a cost to violators of $5 per citation.The cost to install the basic camera system at selected intersections was $50,000.If the cost of a collision is estimated at $1,000 and traffic ticket costs are considered as disbenefits, calculate the B/C ratio for the camera system.Use an interest rate of 0.5% per month and a 3-year study period.

Question 18

The solid waste department of a certain southwestern city has embarked on a program to recycle solid waste materials that previously ended up in a landfill.The program involves distributing blue plastic containers that cost $5 each to 172,000 households.The city gets 10% of the revenue from the sale of recyclables, and the company that manages the recovery operation receives 90%.The smaller volume of disposable solid waste materials will extend the life of the landfill, resulting in equivalent savings of $0,000 per year.If the containers are amortized over a 10-year period at 6% per year, calculate the B/C ratio.The city's share of the revenue is $94,000 per year.

Question 19

The B/C ratio for a mosquito control program proposed by the Harris County Department of Health is reported as 2.3.The person who prepared the report stated that the health benefits were estimated at $00,000, and that disbenefits of $5,000 per year were used in the calculation.He also stated that the costs for chemicals, machinery, maintenance, and labor were estimated at $50,000 per year, but he forgot to list the cost for initiating the program (trucks, pumps, tanks, etc.).If the initial cost was amortized over a 10-year period at 7% per year, what is the estimated initial cost?

Question 20

A water utility is trying to decide between installing equipment for conducting analyses for endocrine disrupting substances, pharmaceuticals, and personal-care products or sending the samples to a private contract lab.The equipment to conduct the tests will cost $95,000 and will have a 5-year life.In addition, a full-time chemist will have to be hired at a cost of $6,000 per year.Expendable supplies (gases, chemicals, glassware, etc.will cost $9,000 per year.The utility anticipates 140 samples per year.If the analyses are sent to an outside lab, the cost per sample will average $250.If the utility uses an interest rate of 6% per year, calculate the B/C ratio associated with purchasing the equipment.

Question 21

Two relatively inexpensive alternatives are available to reduce potential earthquake damage at a top secret government research site.The cash flow estimates for each alternative are shown.At an interest rate of 8% per year, use the B/C ratio method to select one.Use a 20-year study period, and assume the damage costs would occur in the middle of the period, that is, in year 10.

Question 22

The two alternatives shown below are under consideration for improving security at a county jail.Select one based on a B/C analysis at an interest rate of 7% per year and a 10-year study period.

Question 23

Two methods are being evaluated for constructing a second-story floor onto an existing building at the Pentagon.Method A will use lightweight expanded shale on a metal deck with open web joists and steel beams.For this method, the costs will be $4,100 for concrete, $000 for metal decking, $300 for joists, and $600 for beams.Method B will be a reinforced concrete slab that will cost $200 for concrete, $400 for rebar, $600 for equipment rental, and $200 for expendable supplies.Special additives will be included in the lightweight concrete that will improve the heat transfer properties of the floor.If the energy costs for method A will be $00 per year lower than for method B, which one is more attractive at an interest rate of 7% per year over a 20-year study period? Use the B/C method.

Question 24

A public utility in a medium-sized city is considering two cash rebate programs to achieve water conservation.Program 1, which is expected to cost an average of $0 per household, would involve a rebate of 75% of the purchase and installation costs of an ultra low-flush toilet ($00 maximum).This program is projected to achieve a 5% reduction in overall household water use over a 5-year evaluation period.This will benefit the citizenry to the extent of $.25 per household per month.Program 2 would involve turf replacement with desert landscaping.This is expected to cost $00 per household, but it will result in reduced water cost estimated at $ per household per month (on the average).At a discount rate of 0.5% per month, which programs should the utility undertake if the programs are ( a ) mutually exclusive, and ( b ) independent? Use the B/C method.

Question 25

Solar and conventional alternatives are available for providing energy at a remote U.S.Army training site.The costs associated with each alternative are shown.Use the B/C method to determine which should be selected at an interest rate of 7% per year over a 5-year study period.

Question 26

Four methods are available to recover lubricant from an automated milling system.The investment costs and income associated with each are shown.Assuming that all methods have a 10-year life with zero salvage value, determine which one should be selected using a MARR of 10% per year and the B/C method.Consider operating cost as a disbenefit.

Question 27

Engineers working in the Transportation Planning Department for the State of West Virginia have identified three viable sites for a new bridge across the Ohio River.All three sites are within 15 miles of each other, but the land and construction costs vary.The bridge that would directly link the cities on opposite sides of the river would have the lowest travel costs (shortest distance), but it would also have the highest construction cost because of property values.The bridge location just north of the two cities would involve less travel time than the one to the south.The costs associated with each bridge are shown.At an interest rate of 6% per year, determine which location is preferred, assuming the bridges will be permanent.

Question 28

A consulting engineer is currently evaluating 4 different projects for the U.S.government.The present worths of the costs, benefits, disbenefits, and cost savings are shown.Assuming the interest rate is 10% per year compounded continuously, determine which of the projects, if any, should be selected if the projects are ( a ) independent, and ( b ) mutually exclusive.

Question 29

From the AW data shown for projects regarding solid waste handling at a military training facility, determine which project, if any, should be selected from the 6 mutually exclusive projects.If the proper AB/C comparisons have not been made, state which ones should be done.

Selected incremental B/C ratios:
A vs.E = 2.0
B vs.C = 0.75
B vs.D = 0.33
E vs.D = 1.88
F vs.E = 1.33
E vs.C = 4.00
A vs.E = 1.67
A vs.B = 1.35
C vs.F = 2.40
C vs.D = 1.17
B vs.F = 1.24

Question 30

From the AW data shown below for projects regarding campgrounds and lodging at a national park, determine which project, if any, should be selected from the 6 mutually exclusive projects.If the proper comparisons have not been made, state which one(s) should be done.

Selected incremental B/C ratios:
G vs.H = 0.68
G vs.I = 0.73
H vs.J = 0.10
J vs.I = 1.07
G vs.J = 1.07
H vs.K = 1.00
H vs.L = 1.36
J vs.K = 0.82
J vs.L = 1.00
K vs.L = 0.40
G vs.L = 1.02

Question 31

The 4 mutually exclusive alternatives shown are being compared by the B/C method.Which alternative, if any, should be selected?

Question 32

All of the following are examples of public sector projects except

A)bridges.
B)emergency relief.
C)prisons.
D)oil wells.

Question 33

All of the following are usually associated with public sector projects except

A)funding from taxes.
B)profit.
C)disbenefits.
D)infinite life.

Question 34

The conventional B/C ratio is written as

A)B/C = (Benefits - Disbenefits)/- Costs
B)B/C = (Benefits - Disbenefits)/Costs
C)B/C = (Benefits + Disbenefits)/Costs
D)B/C = Benefits/(Costs + Disbenefits)

Question 35

From the values shown, the conventional B/C ratio is closest to

A)1.28.
B)1.33.
C)1.54.
D)2.76.

Question 36

The four mutually exclusive alternatives shown are compared using the B/C method.The alternative, if any, to select is

A)J.
B)K.
C)L.
D)M.

Question 37

The Corps of Engineers compiled the following data to determine which of two flood control dams it should build in a certain residential area.

In conducting a B/C analysis of this data,

A)the DN alternative is not an option.
B)the DN alternative is an option.
C)there is not enough information given to know if DN is an option or not.
D)DN is an option only if the alternatives Ice and T are mutually exclusive.

Question 38

The Corps of Engineers compiled the following data to determine which of two flood control dams it should build in a certain residential area.

The conventional B/C ratio between alternatives Ice and T is closest to

A)0.24.
B)0.33.
C)0.53.
D)0.73.

Question 39

The following 4 independent alternatives are being compared using the B/C method.The alternative(s), if any, to select are

A)J.
B)J and K.
C)L.
D)J and L.

Question 40

For the data shown, the conventional benefit-to- cost ratio at i = 10% per year is closest to
Benefits of $0,000 in year 0 and $0,000 in year 5
Disbenefits of $000 at year 3
Savings (government) of $5,000 in years 1 through 4
Cost of $00,000 in year 0
Project life is 5 years

A)less than 1.5.
B)1.61.
C)1.86.
D)1.98.

Question 41

If benefits are $0,000 per year forever, starting in year 1, and costs are $0,000 at time zero and $0,000 at the end of year 2, the B/C ratio at i = 10% per year is closest to

A)1.1.
B)1.8.
C)0.90.
D)less than 0.75.