ENGG 209 Chapter Notes - Chapter 13: Mansfield

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Moldenhauer
Benefit Cost Analysis (BCA)
Used to determine whether a project is in the public interest or not
In the public sector, the goal is no longer to maximize wealth of a corporation
o Use BCA instead of previous methods
Three kinds of problems
o Maximize benefits for a given set of costs
o Maximize net costs given a variable set of costs
o Minimize costs to achieve a given set of benefits
Method
Users: The public
Sponsors: The government
Must place a monetary value to all costs and benefits
Steps:
o Identify all benefits and disbenefits to the user
o Quantify these in terms of dollar amounts
o Identify and quantify costs to the sponsor
o Determine equivalent net costs and benefits at a base time using the appropriate
discount rate
o Accept if user benefits exceed sponsors costs
User Benefits
o Primary Effects: Directly impact the user
o Secondary Effects: Indirectly impact the user
o Overall benefit B is difference between benefits and disbenefits
o Examples: Time saved / lost, operating costs, parking costs
Sponsors Costs
o All expected expenditures and savings
o Sponsors costs = capital costs + operating / maintenance costs revenues
Social Discount Rate (SDR)
o Equivalent to MARR for a public project
o Two cases currently used:
1. Project has no private sector equivalent
Often non-commercial projects
Generally use the current cost of government borrowing
2. Project has a private sector equivalent
Projects often generate revenue
Private sector project would require borrowing of money
Use the cost of borrowing this money (interest rate) for SDR
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