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ENGR 3360U Winter 2014

Unit 16

Engineering Economic Analysis

in the Public ector

Dr. J. Michael Bennett, P. Eng., PMP,

UOIT,

Version 2014-I-0

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Unit 16 EEA in the Public ectors

!hange Recor"

! 2014#$#0% $nitial !reation

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!ourse ,utline

1' Engineering Economics

2' General Economics

1' )icroeconomics

2' )acroeconomics

3' )oney an" the *an- o.!ana"a

3' Engineering Estimation

4' $nterest an" E/uialence

' Present Worth Analysis

6' Annual !ash lo

%' Rate o. Return Analysis

' Pic-ing the *est !hoice

5' ,ther !hoosing echni/ues

10' Uncertainty an" Ris-

11' $ncome an" &e7reciation

12' A.ter#ta8 !ash los

13' Re7lacement Analysis

14' $n.lation1' )ARR election

16' Public ector $ssues

1%' What Engineering shoul" -no

about Accounting

1' Personal Economics .or the

Engineer

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Unit 16 Roa" )a7

9 16'1 Public "ecision .actors

9 16'2 $nterest rates in the 7ublic 7ro:ects

9 16'3 *ene.it;!ost Ratio

9 16'4 !onentional an" )o"i.ie" *

9 16' $ncremental *

9 16'6 inancing+ "uration+ an" 7olitics o.inestments


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16'1 Public Pro:ects

9 $nestment ,b:ectie ; Pur7ose o. inestment in 7ublic 7ro:ects can

sometimes be ambiguous'

; =General el.are o. society> ; here are "i..erent 7ers7ecties to consi"er'

9 Positie an" negatie e..ects

;

?o "o you measure bene.its orconse/uences@

; he goernment ansers to eeryone'

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ie7oint

9 $n"ustry ie7oint consists largely o. thecounting costs an" bene.its' ; E8ternal conse/uences are ty7ically not consi"ere"

unless there is goernment regulation in that regar"'


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ie7oint

9 Goernment generally ta-es the ie7ointo. its constituents' ; )unici7ality+ 7roince+ an" country

9 A ie7oint in the any 7roblem is to ta-ethe ie7oint at least as broa" as those

ho 7ay the costs an" those ho receie

the bene.its' ; !osts can s7rea" across "i..erent areas an"

bene.it local regions Bbri"ges etc'C'

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1'2 Public Pro:ect $nterest Rate

9 etting an interest rate in the 7ublic sector is not asclear#cut as "oing so in in"ustry'

9 ime#alue o. money ; ome oul" argue that there is little or no time beteen

collecting money .rom ta8 7ayers an" s7en"ing those ta8"ollars'

; As such there is a 0D interest rate

9 !ost o. !a7ital ; )ost leels o. goernment borro money in a""ition to

collecting ta8es an" as such the interest rate shoul" be the

cost o. borroing money'

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Public Pro:ect $nterest Rate+ cont>"'

9 ,77ortunity !ost ; o ty7es ith goernment

9 Government Opportunity Cost: Opportunity cost on bestopportunity foregone to government.

9 Taxpayer Opportunity Cost: Suggests that a taxpayer could have

invested that money instead of paying the taxes.9 General rule o. thumb

; elect the largest o. the9 Cost of Capital9 Government opportunity cost9

Taxpayer opportunity cost9 he goernment may also set gui"elines'


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16'3 *ene.it;!ost Ratio

9 )etho" use" almost e8clusiely in 7ublicinestment analysis

B/C atio ! "#uivalent $orth of net benefits/"#uivalent $orth of costs

F PW bene.its

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*ene.it;!ost Ratio BEWFEIU$AJEN W,R?C

9 he conentional *

9 Net bene.its to users areE87ecte" *ene.its ; &isbene.its

9 &isbene.its are negaties e..ects on in"ii"uals orgrou7s'


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E8am7le 16#2

ho that the *

W an" AW .or this highay 7ro:ect'

irst cost 1')

Annual )aintenance 6K

Annual *ene.its to "riers 22K

300K Ji.e 30 years

$R D


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PW

PW bene.its F 22BP

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W

W bene.its F 22B

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AW

AW bene.its F 22 L 300B

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16'4 )o"i.ie" *

*

30C #6BP

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16' $ncremental *

9 or multi7le alternaties+ it is not 7ro7er tosim7ly calculate the *

alternatie'

9 $ncremental *ene.it;!ost Ratio )etho" ; $"enti.y all releant alternaties Bo7tionalC'

; !alculate the *

; Ran- the or"er o. 7ro:ects9 mallest to largest siOe o. "enominator

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$ncremental *

9 $ncremental *ene.it;!ost Ratio )etho"cont>"' ; $"enti.y increment un"er consi"eration'

9 Joest cost to ne8t highest cost

; !alculate *

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16'6 ,ther Public Pro:ect E..ects

9 Pro:ect .inancing ; maller 7ro:ects are .ully .un"e" through

ta8ation'

; Jarger 7ro:ects may re/uire borroing through bon"s'

9 P3 Public;Priate Partnershi7

; Nee"s i"enti.ie" by the goernment+ ho thenenters into an agreement ith 7riate in"ustry'


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,ther Public Pro:ect E..ects+ cont>"'

9 Pro:ect &uration ; Goernment 7ro:ects o.ten hae long lies'

9 20 to 0 years or longer Bmuseums+ highays+ etc'C

9 Jarge 7ro:ects ith large initial inestment ; Jong lies re"uce the e..ect o. the large

inestment'

9 Joer interest rates re"uce the ca7italrecoery cost'


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Iuanti.ying E..ects

9 )any 7ro:ects hae "i..iculty /uanti.ying bene.its'

; E8am7le buil"ing a school

9 o. bene.it 7er 7erson@ E"ucational outcomes@

9 As a conse/uence o. the "i..iculty ineri.ying bene.its an" "isbene.its+ "i..erent

grou7s may /uanti.y "i..erently to su77orttheir 7ositions'



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Pro:ect Politics

9 Political in.luences hae an im7act on 7ublic 7ro:ects'

9 !om7eting ies an" 7olitical su77ort

; E8am7le Economic "eelo7ment ersusenironmental concerns@

9 !ontroersy9 Jong term 7ro:ects ersus short term

7oliticians9 he role o. 7olitics is .ar#reaching in 7ublic

7ro:ects+ as o77ose" to in in"ustry 7ro:ects'



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ummary

9 Goernments 7ro:ects try to ma8imiOe bene.its tothe 7ublic+ hile minimiOing the "isbene.its to the

7ublic'

9 Jegislatie restrictions ; en" to be larger an" a..ect more 7eo7le an"

grou7s

9 $nterest rates in the 7ublic 7ro:ects are morecom7licate" to "etermine or are legislate"'



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ummary+ cont>"'

9 *ene.its;cost ratio is a i"ely use" metho" toealuate an" :usti.y goernment#.un"e" 7ro:ects'

9 or consi"ering mutually e8clusie alternaties+incremental *

maintenance cost in the "enominator

; )o"i.ie" *

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