Lecture 9

# Lecture 9 - CVEN 349: Civil Engineering Project Management...

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1 CVEN 349: Civil Engineering Project Management LECTURE # 9 Fall 2009 Dr. Ivan Damnjanovic B/C Ratio ± Very Important for Public Works Projects. Because: ± “The Benefits, to whom so ever they may accrue must exceed the Costs to the accrue, must exceed the Costs to the government.” ± Became a piece of 1930’s Bureau of Reclamation legislation and it got applied to everyone. Two Forms of the Relationship (AE) ± Conventional Form Yearly User Benefits / Yearly Government Costs BC = ± Modified Form Yrly Benefits Yrly O&M Costs / Yearly Net Capital Costs = ∑∑

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2 B/C Ratio Example with i=0% Every Benefit and Cost must be converted to an equivalent annual amount. UB = 20 O&M= 5 IC= 100 Yrs= 10 1.3 1.5 B/C = UB / (IC/Yrs +O&M) = B/C = (UB - O&M) / (IC/Yrs) = B/C Ratio with i%>0 AE Initial Cost \$20,000,000 \$3,116,402 Salvage Value 200,000 \$13,164 Life = 10 10 Interest = 9% 9% User Benefits 5 500 000 The Costs are easy to quantify. But what are user 5,500,000 O&M \$2,000,000 Net Benefits =User Benefits - O&M Net Cost =AE of IC - AE of SV Modified B\C= 1.13 Benefits = User Benefits Costs = AE of IC - AE of SV + O&M Conv B/C= 1.08 But what are user benefits? Sometimes that’s a judgment call. ± Pull out a sheet of paper. ± Individually work in 5-minutes. ± Given a project life of 50 years, an Initial Exercise Cost of \$25-million, annual benefits are \$1.25-million and O&M costs are \$500k. Neglecting interest costs and salvage value, what is the B/C ratio using the modified formula?
3 Class Pair Class Pair\Team Problem Team Problem ± Use the B/C Ratio evaluator with i=0% to select the best of the following: A B C Benefits 1,000 1,000 2,000 O&M 100 250 500 Cost 10,000 15,000 15,000 Years 10 20 15 The Answers Are: ± C is the best.

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## Lecture 9 - CVEN 349: Civil Engineering Project Management...

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