Evaluating Projects with the Benefit - Cost Ratio Method
7 important questions on Evaluating Projects with the Benefit - Cost Ratio Method
What is a systematic method of assessing the desirability of government projects or policies and why?
Takes a long term view on future effects and a broad view of possible side effects.
What are [3] common problems consedering mulitple-purpose projects?
- Allocation of the cost;
- Conflict of interest among several purposes of the project;
- Political sensitivity;
What are [8] difficulties in public projects?
- No profit standard of measure financial effectiveness;
- The monetary impact of many of the benefits is difficult to quantify;
- Little or no connection between the project and the public (owner of the project);
- Strong political influence when using public funds;
- Usual profit motive to promote the effective operation is absent;
- Public projects are more subject to legal restrictions;
- The ability of governmental bodies to obtain capital is much more restricted;
- The appropriate interest rate for discounting the benefits and costs is often controversially and politically sensitive;
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CE
- What is it?
- How do you calculate?
- Different way to calculate?
- Concern
Calculation on a yearly basis: Transform cash flows into annuities.
- CE = annuity of the NPV / # units of benefits per year
- CE = NPV / discounted # units of benefit
Concern | What is really the benefit of interest? Peak loads!
What is a big advantage of Benefit-Cost ratio?
- Technique allows comparison;
- Technique allows justification (profitability);
Considering the BC ratio when is a proejcts selected
- independent
- Mutually exclusive
Projects that have a BC >= 1 may be selected
Mutually exclusive
Projects that have a BC > 1, but selecting those projects does not guarantee that the best project is selected.
Give [5] points of criticisms applying BC
- Analyses performedby parties who already formed strong opinions;
- Biases and tricks to work towards desired results;
- Distributional inequities (group benefits, other pays cost);
- Qualitative information is often ignored in BC studies
- (incremental) BC-ratio gives the same information as NPV, does not solve difficulties public projects;
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