W7_HYCIENTH_Building Highway Systems

1.  Problem Recognition, Definition and Evaluation

Two new highway systems are being considered for construction. Project West has a NPW (net present worth) of benefits $30,000,000 and NPW (net present worth) of costs is $20,000,000. Project Southwest has a NPW (net present worth) of benefits $55,000,000 and NPW (net present worth) of costs is $45,000,000. Which highway system should be built?

2.  Development of Feasible Alternatives

Several economic analysis techniques are available to enable accurate choices between competing alternatives. They are:

1.     Net Present Worth,

2.    Capitalized Cost,

3.    Annual Cash Flow Analysis,

4.    Rate of Return Analysis,

5.    Benefit-Cost Ratio Analysis, and

6.    Payback Period

3.  Development of the outcomes for each alternative

 Working out the Benefit Cost (B/C) Ratio Analysis for each option.

Project West:

B/C      = $30,000,000 NPW Benefits/ $20,000,000 NPW Costs

= 1.50 B/C Ratio

Project Southwest:

B/C      = $55,000,000 NPW Benefits/ $45,000,000 NPW Costs

=  1.22 B/C Ratio

4.  Selection of a Criteria

The project with a positive benefit cost ratio is the most attractive/preferred project.

5.  Analysis and Comparison

Project Name	Project West	Project Southwest
B/C Ratio	1.50	1.22
	Best Choice

6.  Selection of the Preferred Alternative

Both Project West and Project Southwest have positive B/C ratio, but Project West is most preferred to Project Southwest given that it has a higher B/C ratio

7.  Performance Monitoring & Post Evaluation of Results

Project Southwest has more NPW benefit than Project West ($55,000,000 > $30,000,000).  Perhaps, if the maintenance cost for Project Southwest can be reduced. Also, if the dis-benefits of each project were considered,( e.g, increased noise levels from commercial jet traffic to homeowners), Project West B/C ratio might fall below acceptable desirability level. Also, the issue of time is ignored in the above analysis.

8.  Reference:

1.     Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2012). Engineering Economy (15th ed.), Chapter 14, New Jersey, NJ. Pearson Higher Education, Inc.

2.     Shively, G., Galopin, M. An Overview of Benefit-Cost Analysis (2007). Retrieved from: http://www.agecon.purdue.edu/staff/shively/COURSES/AGEC406/reviews/bca.htm

3.     Amos, J. S. et al. (2012). Skills &Knowledge of Cost Engineering (5^th ed), AACE International, Morgantown, USA.