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Engineering Economics

Cost Benefit Analysis

Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Methods of Analysis
Present worth Future worth Annual Worth - Finding the annual equivalent cost for each alternative Capitalized cost

Study period
Pay back Period Internal rate of return (IRR)

Project balance (PB)


Cost benefit analysis
Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Cost Benefit Analysis (CBA)


A cost benefit analysis is done to determine how well, or how poorly, a planned action will turn out Although a cost benefit analysis can be used for almost anything, it is most commonly done on financial aspects Cost benefit analysis relies on the addition of positive factors and the subtraction of negative ones to determine a net result

A cost benefit analysis


finds, quantifies, and adds all the positive factors. These are the benefits Then it identifies, quantifies, and subtracts all the negatives, the costs The difference between the two indicates whether the planned action is advisable
Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Cost Benefit Analysis (CBA)


Weighing the total expected costs against the total expected benefits in order to choose the best or most profitable option.

The formal process is often referred to as CBA (Cost-Benefit


Analysis) It is an analysis of the cost effectiveness of different alternatives in order to see whether the benefits outweigh the costs The process involves monetary value of initial and ongoing expenses vs. expected return A technique designed to determine the feasibility of a project or plan by quantifying its costs and benefits
Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Application and History


The concept of CBA dates back to an 1848 article by Dupuit and was formalized in subsequent works by Alfred Marshall The practical application of CBA was initiated in the US cost benefit analysis for proposed federal waterway infrastructure in 1936 Subsequently, costbenefit techniques were applied to the development of highway and motorway investments in the US and UK in the 1950s and 1960s An early and often-quoted, more developed application of the

technique was made to London Underground Victoria Line


Over the last 50 years, costbenefit techniques have gradually developed
Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Benefit Analysis - Formula


BCR (benefit cost ratio = PVB / PVC) this should be

equal to 1 for the project to be economically


feasible Net benefit = PVB PVC = 0

Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Principles
1. There must be a common unit of measurement 2. CBA represents values by actual behavior 3. Benefits are usually measured by market choices 4. Measurements of intangibles & tangibles 5. Analysis involves comparison

6. CBA involves a particular study area and time

Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Numerical
A telecom system is expected to cost $43,250,000 to complete. The revenues generated by the new plant are expected to be $3,875,000 per year while

operational expenses are estimated to $2,000,000 per year. If the system is


expected to last forty years and the authority uses 3% as interest, determine if the system should be built? (Use B/C ratio analysis)

We can find the present worth or the annual worth PW benefits = 3875000 PW Costs = 43250000 + 2000000 B/C = 89489051.1 / 89437897.34 = 1 = 89489051.1 =89437897.34 Build the plant

Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Quiz

Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

Advance greeting & Best wishes to you all for Eid

Cost Benefit Analysis, Ejaz Gul, FUIEMS, 2009

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