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SOME PROBLEMS IN USING BENEFIT'COST RATIOS WITH

THE ANALYTIC HIERARCHY PROCESS
a b
Richard H. Bernhard & John R. Canada
a
North Carolina State University and Norwegian Institute of Technology
b
North Carolina State University
Published online: 30 Mar 2007.

To cite this article: Richard H. Bernhard & John R. Canada (1990) SOME PROBLEMS IN USING BENEFIT'COST RATIOS WITH THE
ANALYTIC HIERARCHY PROCESS, The Engineering Economist: A Journal Devoted to the Problems of Capital Investment, 36:1,
56-65, DOI: 10.1080/00137919008903031

To link to this article: http://dx.doi.org/10.1080/00137919008903031

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 Volume 36 -Number 1 The Engineering Economist
Fall 1990

Technical Notes

SOME PROBLEMS IN USING BENEFITICOST

RATIOS WITH THE ANALYTIC HIERARCHY PROCESS

Richard H. Bernbard
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North Carolina State University and Norwegian Institute of Technology

and
John R. Canada
North Carolina State University
ABSTRACT
For Analytic Hierarchy Process applications having separate benefit and cost output vectors, Saaty
has recommended choosing a solution using a simple benefit/cost ratio procedure. B u t , even when
benefits and costs are known with certainty and measured in dollars, it is shown t h a t this procedure does
not, in general, yield a n optimal solution. An incremental analysis, with further specification of a n
appropriate cutoff rate, is shown to be required. Saaty's procedure is also shown t o be sensitive to
arbitrary semantic changes in benefit and cost labelling, while proper procedures, such as the one
proposed herein, d o not have that sensitivity.

INTRODUCTION
One of the most popular aids to decision making developed and implemented during
the past decade has been the Analytic Hierarchy Process, AHP. This process, originally
developed and publicized by Saaty [5 and 61, has been made widely and conveniently
available through the "Expert Choice" software developed by Forman e t al. [3]. The AHP
calls for structuring a decision making situation in the form of one or more hierarchies and,
for each such hierarchy, yields as an output a vector of positive numbers adding t o 1, with
each number being associated with one of the mutually exclusive courses of action under
consideration. When, for a given situation, there is only one such hierarchy and, hence,
only one such vector, the usual recommendation is to implement the alternative associated
with the highest number in the vector.
The n~ethodology of the AHP with a single hierarchy and the assumptions
underlying it have been extensively discussed and criticized in the analytical literature.
For a particularly well-done general survey of this literature, see Zahedi 1.91, and for a
further, excellent discussion of the criticisms, see French [4, Section 10.31. It is not the
intent of the present exposition to review these well-known criticisms of the
 Volume 36 - Number 1 57

single-hierarchy AHP. Rather, following Saaty [5 and 61, it is assumed herein that the
single output vector associated with any such single-hierarchy AHP can, indeed, be
correctly and meaningful procured.
But, in many applications of the AHP, two hierarchies and, hence, two output
vectors are associated with a given situation, one for its "benefits" and the other for its
"costs", and hence a further question arises with regard to how these two vectors should be
combined for deciding which alternative to implement. Saaty [5, pp. 115-1171, for
example, presents an illustrative case contrasting the benefits and costs of three
alternatives, a ferry, a bridge, and a tunnel, for providing a transportation link across a
river. Later, (6, pp. 207-2121, he presents two further such examples, one involving a
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contrast of a family's prospective benefits and costs for alternative home computers they
might buy, and a related one involving a contrast of their prospective benefits and costs
from the home computer previously judged best vs. alternative ways in which they might,
instead, use the money. In industrial engineering settings, Arbel and Seidmann [I] and
Varney, Sullivan and Cochran [8] have both applied the same idea to contrasts of the
respective benefits and costs of alternative flexible manufacturing systems, and Saaty and
Kearns (7, pp. 181-1821 have used it to contrast the benefits and costs associated with
establishing production facilities in alternative foreign countries.
For combining the benefit and cost vectors in such a problem and thence deciding
which alternative should be chosen, Saaty [5 and 61 has recommended computing the ratios
of the benefit and cost vector elements for the respective alternatives and choosing the
alternative with the highest such ratio. But it is the principal purpose of the present
exposition to show that, even in very simple circumstances where the optimal choice can be
clearly found by other means, this recommended procedure will not necessarily or in
general yield that optimal choice. Saaty and Kearns (7, p. 1861 briefly indicate an
awareness of the shortcomings in Saaty's procedure, but, even there, the numerical
examples continue to use that procedure and fail to illustrate at all how easily it may lead
to an incorrect decision.
Two major and crucial features are missing from Saaty's ritual. One is
consideration of incremental benefitlcost ratios. In standard benefitlcost ratio analysis,
where benefits and costs are measured in monetary units, the nced for incremental
comparison of alternatives is, of course, well-known; see for example, Bernhard 12). As
shown below, that same need carries over to the case where the benefits and costs are AHP
vector components. But here there is an additional requirement which is also missing from
Saaty's procedure, namely inclusion and consideration of some further information with
 58 The Engineering Economist

regard to the decision maker's relative preferences for increments of benefits vs. increments
of costs. Without that further information, a meaningful decision cannot, in general, be
reached.
To illustrate these points particularly clearly, it is convenient to consider the
simple, standard situation in which, for each available alternative, prospective benefits and
prospective costs are known with certainty and measured in dollars, or some other common
index, and the decision maker's utility is linearly increasing with that index. The best
alternative is then, clearly, the one which offers the highest net difference of benefits minus
costs; see, for example, Bernhard 121. Presented below is an incremental benefit/cost ratio
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ritual which is guaranteed to make that correct choice and which uses the output benefit
and cost vectors from Saaty's AHP. However, for making that correct choice, this ritual
requires knowledge of a cutoff ratio, not required in Saaty's procedure, but inevitably
required for reaching a correct decision! For this simple situation, that cutoff ratio
provides the necessary "further information" cited above. With a simple example in the
setting of Saaty's river-crossing situation, it is shown that, while Saaty's procedure does
not change its choice, any one of the available alternatives can be the actual optimum
depending upon the level of the cutoff ratio, which Saaty's procedure ignores.
Finally, consideration is given herein to the purely semantic matter of whether a
particular positive feature of an alternative is called a "benefit" or a "negative cost" or
whether a particular negative feature is called a "cost" or a "disbenefit". While such
arbitrary choices will, in general, affect the stated benefits, costs, benefitlcost ratios, and
cutoff ratio in the ritual proposed herein, it is shown that they do not affect the correct
dccision recommended by this ritual. On the other hand, again in the setting of Saaty's
river-crossing situation, it is shown, by example, that, with a simple such purely arbitrary
scmantic change, the choice made by his recommended procedure may well switch from one
wrong answer to another wrong one! The problem, of course, continues to be that the
ritual Saaty has proposed fails to use incremental benefit/cost ratios, and it ignores the
essential further piece of information here, that is the cutoff ratio cited above.

FOR TIIE SIMPLE SITUATION, COIULECT INCREMENTAL BENEFIT/COST

RATIO RULES USING VECTOR OUTPUTS FROM THE AHP
For the above-cited simple situation in which prospective benefits and costs are
known with certainty and measured in dollars, and the decision maker's utility increases
linearly with dollars, suppose that a total of n proposed projects are under consideration.
For a.ny pa.rticular such project, i, where i=1,2 ,...,n, let:
 Volume 36 - Number 1

Ci
2

-
B . = Benefit, in dollars, procurable from project i, where Bi> 0.
Cost, in dollars, which would be incurred by project i, where Ci > 0.

bi E (Bi /k) = Normalized benefit for project i, and hence bl+b2+ ...+bn=l.
ci z (Ci /k,) = Normalized cost for project i, and hence cI+c2+ ...+cn=l.
Then, under the simple assumptions described, if one further assumes that the decision
maker is perfectly consistent, the vectors, [b,,b 2,...,b,], and [cl,c2 , . . . , cn1, are, respectively,
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those which would be yielded here by his or her consideration of the benefits and costs
under the AHI'.
Clearly, an independent such project, i, will be attractive to the decision maker if
and only if the net gain from it is nonnegative, that is if and only if Bi-Ci 2 0. But, as
shown in the Appendix below, in terms of AHP benefit and cost vector elements, that is
equivalent to saying project i is attractive, if and only if ( b i /ci) 2 (k'lk).
Similarly, for any two mutually exclusive projects, j and i, the decision maker will
prefer the former over the latter if and only if B.-C. > Bi-Ci If C . = Ci and, hence c . = ci,
J 1- I I
then, as also shown in the Appendix, this is equivalent to saying project j is preferred to
project i if and only if b . > b , or, equivalently, if and only if (b. / c ) > (b. / c J . More
3 - 1 1 I I

generally, if C'. # C,, then, without loss of generality, subscripts may be assigned so that
I
C. > C, and, hence, c . > ci, and, as also shown in the Appendix, it is equivalent to say that
I I
project j i s preferred to project i if and only if [(b.-b.)/(c-c.)] 2 (kf/k). Note, incidentally,
3 1 1

that a necessary condition for this last requirement to be satisfied is that b . > b.. So, in
1 - 1

either case here, only such alternatives to project i even need to be considered.
Also note that, unlike the case of standard, simple benefitlcost ratio analysis, the
cutoff ratio, (kT/k), here is not necessarily or in general equal to 1. Ordinarily here, for
interesting projects, k, the sum of the benefits, would exceed k', the sum of the costs, and
hence the cutoff ratio (k'lk), would be less than 1.

CORRECT AND INCORRECT SOLUTIONS OF A IUVER-CROSSING EXAMPLE

For an illustrative example, consider a situation, like the above-cited one of Saaty's,
in which there are three explicitly-presented, mutually exclusive alternative projects for
 60 The Engineering Economist

providing a transportation artery across a river, namely, 1: Establish Ferry Service, 2:

Build a Bridge, and 3: Build a Tunnel, and, implicitly, there is a fourth alternative, Do
Nothing. Suppose, for this situation, that two AHP analyses have yielded, respectively,
the following normalized benefit and cost vectors: [bl=.067,b2=.333,b3=.600],and
[c1=.050 'c2 =.300 'c3=.650]. Then Saaty's [5 and 61 procedure, which recommends
undertaking the project with the highest (bi/ci) ratio, here picks project 1, the Ferry, since
(bl/cl) = 1.340 > [(b2/c2) = 1.110, or (b3/c3) = 0.9231.
But it is easy to show, as follows, that this is not necessarily the right decision here.
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As indicated in the general discussion of the previous sections, the information used in
Saaty's analysis is incomplete. To make a proper decision here, one must also know and
use the cutoff ratio, (k'lk). Also, a proper benefitlcost ratio analysis will use incremental
benefits and costs.
For example, with the bis and c.'s I
as given above, suppose that B1 = $10 million,
B2 = $50 million, B3 = $90 million, Cl = $5 million, C2 = $30 million, and C3 = $65
million, and, hence, k = $150 million, k, = $100 million, and (k,/k) = 0.670. Then,
applying the above, correct general rules, one finds that since (bl/cl) = 1.340 > 0.670 =
(kP/k),project 1, the Ferry, is better than the fourth alternative, Do Nothing. But, since
[(b2-b1)/(c2-c1)] = 1.064 > 0.670 = (k'lk), project 2, the Bridge, is even better than
project 1, the Ferry, and also, since [(b3-b2)/(c3-c2)] = 0.763 > 0.670 = (k'lk), project 3,
the Tunnel, is even better than project 2, the Bridge. So, contrary to the conclusion of the
Saaty-type analysis here, the proper project to implement is project 3, the Tunnel, not
project 1, the Ferry. Note, incidentally, that, with the former, the net gain will be B3 - C3
= $25 million, while, with the latter, it would have been only B1 - Cl = $5 million.
Furthermore, observe here that the correct choice is sensitive to the level of the
cutoff ratio, (k'lk). For example, with the bis, cis, B;s, and, hence, k as given above,
suppose the Cits are changed such that now Cl = $6.5 million, C2 = $39 million, and C3 =
$84.5 million. Then the cutoff ratio numerator is changed to kt = $130 million and the
ratio itself to (k'lk) = 0.867. Now, again applying the correct, general benefit/cost ratio
rules from above, one finds that since (bl/cl) = 1.340 > 0.867 = (k'lk), project 1, the
Ferry, is still preferred over the Do Nothing alternative, and since [(b2-bl)/(c2-c,)] = 1.064
> 0.867 = (kT/k),project 2, the Bridge, is still preferred over project 1, the Ferry. But
 Volume 36 - Number 1 61

now, since [(b3-b2)/(c3-cJ] = 0.763 < 0.867 = (k'lk), project 3, the Tunnel, is no longer
preferred over project 2, the Bridge.
The change in k',and thus in the ratio, (k'lk), has, indeed, changed the correct
choice from project 3, the Tunnel, to project 2, the Bridge, even though neither the
individual ratios of normalized benefits and costs nor the incremental ones were changed!
Note that, now, with the Bridge, the net gain will be B2 - C2 = $11 million, while, with
the Tunnel, it would have been only B3 - C3 = $5.5 million. Also note that Saaty's
above-described, incorrect type of analysis is insensitive to the change in k', and thus, still
incorrectly, it continues to choose project 1, the Ferry here.
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More generally, in the same manner, depending upon the (k,/k) ratio, even though
the b;s and c;s and, hence, their individual and incremental ratios are completely
unchanged, any one of the four alternative courses of action can be optimal here. The
correct decision depends upon the level of (k,/k) in accordance with the following table:

Range of (k, /k)

I (<0.763) 1 (0.763,1.064) / (1.064,1.340) 1 (>1.340)

Optimal Project 3, Project 2 Project 1, No Project;

Alternative the Tunnel the Bridge the Ferry Do Nothing

So, even in this very simple case, contrary to what Saaty's discussions imply, with just a
knowledge of the AHP benefit and cost output vectors, [bl,b2 ,...,bn], and [cl,c2,...,cJ, a
decision cannot be made. One must have further information as to the relative values of
the benefits in relationship to the costs. Under the simple assumptions of the analysis
presented herein, that is given by the cutoff ratio, (k,/k).

IMPACT O F ARBITRARINESS IN LABELLING OF "BENEFITS1' AND "COSTS"

As with standard benefitlcost ratio analysis, there is general arbitrariness, even in
the above-described correct procedure, with regard to whether any given negative feature
of a project is called and included as a "cost1' or a "disbenefit" and whether any given
positive feature is called and included as a "benefit" or a "negative cost1'. In each case, the
difference is purely semantic, and it is easy to show, as follows, that in the correct
procedure, though it does, in general, affect the levels of the benefitlcost ratios and cutoff
ratio used, it cannot affect the decision reached, which, after all, is the goal of the analysis
here. On the other hand, in the incorrect type of analysis proposed by Saaty, the
 62 The Engineering Economist

arbitrariness in labelling can affect not only the benefitlcost ratio used but also the
decision reached; an extension of the above example is presented below in which an
arbitrary labelling revision changes the previous wrong answer of Saaty's procedure to
another answer which, alas, is still wrong!
Let:
Bi 5 Original stated benefit, in dollars, procurable from project i, where Bi > 0.
, Original stated cost, in dollars, which would be incurred by project a, where
c.> 0.
I
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hi For project i, the amount, in dollars, which, if positive, is now to be treated

as a "cost" rather than as a "disbenefit" or as a "benefit" rather than as a
"negative cost", and vice-versa if it is negative.
Thus,
B I. = B. + hi = Revised stated benefit, in dollars, procurable from project i, where,
I

still, B I. > 0.

C, = c, + hi = Revised stated cost, in dollars, which would be incurred by project

i, where, still, C, > 0.
It is easy to see that Ei - ci >7 0 as Bi -
> 0, and that
C. = B. -
> B- . -
C. = c.as BI. - CI. =><
1 < I I < 1 I

Bi - GI. Also, as argued above, project selection using the correct benefit/cost ratio rules,
with normalized benefit and cost vectors based on the unbarred indices, Bi and Ci, is
completely consistent with using the unbarred net gain index, Bi - C,, itself. Therefore,
inevitably, that selection will also be completely consistent with using the barred net gain
index, B.: - cI.
The normalized vectors based on the revised stated benefits and costs will,
in general, be different from those based on the original ones, and the benefitlcost ratios
and cutoff ratio will, in general, be changed, but the project selection decision will,
inevitahly, remain exactly the same as before!
For example, for the river-crossing situation above, the original benefits and costs,
now denoted by barred letters, were B, = $10 million, B2 = $50 million, B3 = $90 million,
el = $5 million, c2= $30 millioq and I?, = $65 million. Then consider a simple semantic

change under which a negative feature of project 1 is now to be treated as a "cost" rather
than as a "disbenefit"; let hl = $5 million, h2 = $0 million, and h3 = $0 million. So, now,
 Volume 36 - Number 1 63

B1 = $15 million, B2 = $50 million, B3 = $90 million, Cl = $10 million, C2 = $30 million,
C3 = $65 million, k = $155 million, and k' = $105 million, and, hence, the cutoff ratio is
revised t o be (k'/k) = 0.677. Also, now, the normalized benefit and cost vectors are,
respectively, revised to be: [bl = ,097, b2 = ,323, b3 = ,5811, and [cl = ,095, c2 = ,286,
c3 = ,6191. Then, as before, using here the correct benefit/cost ratio rules from above, one
finds that since (bl/cl) = 1.021 > 0.677 = (kC/k),project 1, the Ferry, is still shown t o be
better than the Do Nothing alternative, that since [(b2-bl)/(c2-cl:l] = 1.183 > 0.677 =
(kf/k), project 2, the Bridge, is still shown to be even better than project 1, the Ferry, and
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that since [(b3-b2)/(c3-c2)] = 0.775 > 0.677 = (kr/k), project 3, the Tunnel, is still shown
to be even better than project 2, the Bridge, So, as has to be the case, though the
benefitlcost ratios and cutoff ratio have changed, the procedure's correct choice of project
3, the Tunnel, has not changed.
On the other hand, since, now, (b2/c2) = 1.129 > [(bl/cl) = 1.021, or (b3/c3) =
0.9391, observe that choosing the alternative with the highest such ratio, as recommended
by Saaty, now picks project 2, the Bridge, a change from its previous choice of project 1,
the Ferry, but still a wrong choice! Thus the result given by Saaty's incorrect procedure is,
indeed, generally sensitive to the completely arbitrary, semantic matter of bow "benefits"
and "costs" are labeled. Any correct procedure must, of course, be insensitive to that
matter.

CONCLUSION
It has been shown that the procedure proposed by Saaty for doing a benefit/cost
ratio analysis, with benefit and cost vectors from his famous AHP, is not, in general,
correct. Even for the very simple situation where benefits and costs are known with
certainty and measured in dollars, and the decision maker has a linearly increasing utility
function for money and is completely consistent in his judgments, it has been shown that
Saaty's procedure does not, in general, give an optimal solution. An incremental
benefit/cost ratio analysis, with the further specification of an appropriate cutoff ratio, has
been shown to be required.
More generally, of course, where benefits and costs are not measurable in
commensurate units, a more complex analysis would be required. But, inevitably, above
and beyond benefit and cost output vectors from application of the AHP, that would also
continue to require some sort of further consideration and specification of the decision
 64 The Engineering Economist

maker's relative willingness to incur various levels of the costs in order to receive
corresponding levels of the benefits. For the very simple situation considered herein, that
further information is given by the cutoff ratio,.(k'/k).

APPENDIX
> 0 as (b, /cJ >
To show that Bi - Ci 7 2 (k'/k):

Q.E.D.
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> B. - C. as b . =
To show that if C . = C,, then c . = c,, and B . - C. = >
> 6 . as (b. /c.) =
3 I 3 I < 1 I I < r I I <
(b, /cJ:
If C . = C,, then k ' c . = k'c., and hence c . = c.. Also, B . - C . >
= Bi- C.as B . >
= B.
I 1 I I 1 1 I < r I < I
> kb,as b . => b.as ( b . / c ) =
as kb.= > (bi/c.).
1< I < 1 I I < I

Q.E.D.

>
To show that if C . > C,, then c. > c., and B. - C. 2 B. - C. as [(b.-b.)/(c.-c.)] =
I I 1 I I < ' I 3 1 I : <
(k,/k):
If C . > C,, then k r c . > kc,, and hence c . > ci. Also, B . - C . 2 Bi- Ci as 6b.- k'c.
I 3 3 I I < I 1
2< kb.-
r
k'c.as
I
k(b.-b.)
] I <
2 k,(c.-c.)
3 1
as [(b.-b.)/(c7c.)]
1 1 I : (k'lk).

REFERENCES
Arbel, Ami and Abraham Seidmann, "Performance Evaluation of Flexible
Manufacturing Systems," IEEE Transactions on Systems, Man, and Cybernetics, Vol.
SMC-14, NO. 4 (July-August 1984), pp. 606-617.
Bernhard, Richard H., "A Comprehensive Comparison and Critique of Discounting
Indices Proposed for Capital Investment Evaluation," The Engineering Economist,
Vol. 16, No. 3 (Spring 1971), pp. 157-186.
Forman, Ernest H., Thomas L. Saaty, Mary Ann Selly, and Rozann Waldron, Ezpert
Choice, McLean, VA, Decision Support Software, Inc., 1983.
 Volume 36 - Number 1 65

French, Simon, Decision Theoy: An Introduction to the Mathematics of Rationality,

New York, NY, John Wiley and Sons, Inc. 1986.
Saaty, Thomas L., The Analytic Hierarchy Process, New York, NY, McGraw-Hill
Book Company, Inc., 1980.
Saaty, Thomas L., Decision Making for Leaders, Belmont, CA, Wadsworth, Inc., 1982.
Saaty, Thomas L. and Kevin P. Kearns, Analytical Planning: The Organization of
Systems, Elmsford, NY, Pergamon Press, Inc., 1985.
Vorney, Mark S., William G. Sullivan, and Jeffrey K. Cochran, "Justification of
Flexible Manufacturing Systems with the Analytic Hierarchy Process," Proceedings of
the 1985 International Industrial Engineering Conference, Norcross, GA, Institute of
Industrial Engineers, 1985.
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Zahedi, Fatemeh, "The Analytic Hierarchy - A Survey of the Method and its
Applications," Interfaces, Vol. 16, No. 4 (July-August 1986), pp. 96-108.
@a

COMMENTS ON FUTURE WORTH AND ITS RELATIONSHIP

TO PRESENT WORTH AS AN INVESTMENT CRITERION
Ralph 0. Swalm
Syracuse University

The following comments are based on the article "On Future Worth and Its
Relationship to Present Worth as an Investment Criterion" by G. A. Fleischer and L. C.
Leung, The Engineering Economist, Volume 35 - Number 4.
Plots of the Net Present value, Net Future Value, and, when the underlying
assumptions are reasonable, Uniform Annual Equivalents are quite useful in selecting
among alternatives. They show the range of interest rates over which each alternative,
including the ever present Do Nothing alternative, is to be preferred. As Fleischer and
Leung infer, these ranges are independent of the type of curve chosen.
This Technical Note points out that the maxima of the Net Present Value and Net
Future curves occur at differing values of the interest rate. This hardly needs proof, since
the NFVat any value of i is equal to the NFV times (l+ilN. More important, of what
operational value is the knowledge of the points at which such curves reach their maxima,
or whether or not such curves reach their maxima at differing interest rates? Such
information is surely of glorious indifference to a decision maker. It would therefore appear
that this Technical Note offers a fine example of what Bert Norern so colorfully calls, "The
triumph of technique over accomplishment!".
m