EXAMPLE 2.

2: The Cement Factory Case

As discussed in the introduction to this chapter, the Houston American Cement factory will require an
investment of $200 million to construct. Delays beyond the anticipated implementation year of 2012
will require additional money to construct the factory. Assuming that the cost of money is 10% per
year, compound interest, use spreadsheet functions to determine the following for the board of
directors of the Brazilian company that plans to develop the plant.

(a) The equivalent investment needed if the plant is built in 2015.

(b) The equivalent investment needed had the plant been constructed in the year 2008.

Solution:
Figure is a cash flow diagram showing the expected investment of $200 million ($200 M) in 2012, which
we will identify as time t=0 . The required investments 3 years in the future and 4 years in the past are
indicated by F 3=? and P− 4=? ,respectively.

(a) To find the equivalent investment required in 3 years, apply the F/P factor. Use $1 million units
and the tabulated value for 10% interest.
F 3=P( F /P , i ,n)=200( F /P , 10 % , 3)=200(1.3310)
¿ $ 266.2($ 266,200,000)

n i PV FV
3 10% $200 ($266.20)

(b) The year 2008 is 4 years prior to the planned construction date of 2012. To determine the
equivalent cost 4 years earlier, consider the $200 M in 2012 (t =0) as the future value F and

apply the P/ F factor for n=4 to find P− 4.

P− 4=F ( P/ F , i, n)=200(P /F ,10 % , 4)=200(0.6830)
 ¿ $ 136.6($ 136,600,000)
n i FV PV
($136.60
4 10% $200 )

Summery:
In this example we must calculate two values, one for future and one is for past. The value of past is
$136.6 million while the value of the future is $266.2 million. This equivalence analysis indicates that at
$136.6 M in 2008, the plant would have cost about 68% as much as in 2012, and that waiting until 2015
will cause the price tag to increase about 33% to $266 M. From this to plant must be built in 2008 to save
the amount. Because the cost is low.

EXAMPLE 2.4 The Cement Factory Case

As mentioned in the chapter introduction of this case, the Houston American Cement plant may generate
a revenue base of $50 million per year. The president of the Brazilian parent company Votorantim
Cimentos may have reason to be quite pleased with this projection for the simple reason that over the 5-
year planning horizon, the expected revenue would total $250 million, which is $50 million more than the
initial investment. With money worth 10% per year, address the following question from the president:
Will the initial investment be recovered over the 5-year horizon with the time value of money considered?
If so, by how much extra in present worth funds? If not, what is the equivalent annual revenue base
required for the recovery plus the 10% return on money? Use both tabulated factor values and spreadsheet
functions.
Solution:
(a) Use the P/A factor to determine whether A=$ 50 million per year for n=5 years starting 1 year
after the plant’s completion (t =0) at i=10 % per year is equivalently less or greater than $200
M.

P=50 ( P/ A ,10 % ,5)=50(3.7908)

¿ $ 189.54($ 189,540,000)
n i A PV
5 10% $50 ($189.54)

(b) To determine the minimum required to realize a 10% per year return, use the A/P factor.
A=200( A/ P , 10 % , 5)=200(0.26380)
¿ $ 52.76 per year
n i PV A
($52.76
5 10% $200 )

Summery:
We use PV and PMT functions to answer both part of question.
(a) The use of ¿ PV (i% , n , A , F) on the left side to find the present worth of $189.4 million. The
present worth value is less than the investment plus a 10% per year return, so the president should
not be satisfied with the projected annual revenue. So, this project is worthless.
(b) The use of ¿ PMT ( i% ,n , P , F ) on the right side to determine the minimum A of $52,760,000
per year. This part is the solution to tell how much project must develop money to keep safe us
from the lost. The plant needs to generate $52,760,000 per year to realize a 10% per year return
over 5 years.

EXAMPLE 2.6 The Cement Factory Case

Once again, consider the HAC case presented at the outset of this chapter, in which a projected $200
million investment can generate $50 million per year in revenue for 5 years starting 1 year after start-up.
A 10% per year time value of money has been used previously to determine P, F, and A values. Now the
president would like the answers to a couple of new questions about the estimated annual revenues. Use
tabulated values, factor formulas, or spreadsheet functions to provide the answers.
(a) What is the equivalent future worth of the estimated revenues after 5 years at 10% per year?
(b) Assume that, due to the economic downturn, the president predicts that the corporation will earn
only 4.5% per year on its money, not the previously anticipated 10% per year. What is the
required amount of the annual revenue series over the 5-year period to be economically
equivalent to the amount calculated in ( a ) ?
Solution:
(a) Note that the last A value and F=? both occur at the end of year n=5.

F=50( F / A ,10 % ,5)=50(6.1051)

¿ $ 305.255($ 305,255,000)
 n i A F
($305.26
5 10% $50 )

(b) The president of the Brazilian company planning to develop the cement plant in Georgia is
getting worried about the international economy. He wants the revenue stream to generate the
equivalent that it would at a 10% per year return, that is, $305.255 million, but thinks that only a
4.5% per year return is achievable.
0.045
A=305.255( A/ F , 4.5 % , 5)=305.255
[ (1.045)5 −1 ]
=305.255(0.18279)

¿ $ 55.798
n i F A
5 4.5% ($305.26) $55.80

Summery:
This question has two parts so, I will explain it into two parts.
(a) Apply the FV factor in the format ¿ FV (10 % , 5,50) to determine F=$ 305.255 million.
Because there is no present amount in this computation. If the rate of return on the annual
revenues were 0%, the total amount after 5 years would be $250,000,000. The 10% per year
return is projected to grow this value by 22%.
(b) It is easy to answer this question by using the ¿ PMT ¿ ) function with i=4.5 % and
F=$ 305.255 found in part (a) . The annual revenue requirement grows from $50 million to
nearly $55,800,000. This is a significant increase of 11.6% each year.

EXAMPLE 2.10 The Cement Factory Case

The announcement of the HAC cement factory states that the $200 million (M) investment is planned for
2012. Most large investment commitments are actually spread out over several years as the plant is
constructed and production is initiated. Further investigation may determine, for example, that the $200
M is a present worth in the year 2012 of anticipated investments during the next 4 years (2013 through
2016). Assume the amount planned for 2013 is $100 M with constant decreases of $25 M each year
thereafter. As before, assume the time value of money for investment capital is 10% per year to answer
the following questions using tabulated factors and spreadsheet functions, as requested below.
(a) In equivalent present worth values, does the planned decreasing investment series equal the
announced $200 M in 2012? Use both tabulated factors and spreadsheet functions.
 (b) Given the planned investment series, what is the equivalent annual amount that will be invested
from 2013 to 2016? Use both tabulated factors and spreadsheet functions.
(c) (This optional question introduces Excel’s Goal Seek tool.) What must be the amount of yearly
constant decrease through 2016 to have a present worth of exactly $200 M in 2012, provided
$100 M is expended in 2013? Use a spreadsheet.
Solution:

(a) The investment series is a decreasing arithmetic gradient with a base amount of $100 M in year 1
(2013) and G=$−25 M through year 4 (2016). Figure diagrams the cash flows with the shaded
area showing the constantly declining investment each year. The PT value at time 0 at 10% per
year is determined by:
PT =P A −P G=100(P / A ,10 % , 4)−25(P /G , 10 % , 4 )
¿ 100(3.1699)−25(4.3781)
¿ $ 207.537( $ 207,537,000)
G ($25)
Investmen
year n t
2012 0
2013 1 $100 i P
2014 2 $75 10% $207.53
2015 3 $50
2016 4 $25

(b) There are two equally correct ways to find AT . First, apply Equation that utilizes the A/G factor,

and second, use the PT value obtained above and the A/P factor.
AT =100 – 25( A /G ,10 % , 4)=100−25(1.3812)
¿ $ 65.471($ 65,471,000 per year )
Use PT :
AT =207.537( A /P ,10 % , 4)=207.537( 0.31547)
¿ $ 65.471 per year
n i P A
($65.47
4 10% $207.53 )

(c) The Goal Seek tool is described in Appendix A. It is an excellent tool to apply when one cell
entry must equal a specific value and only one other cell can change. This is the case here:
G ($26.72)
Investmen
year n t
2012 0
2013 1 $100.00 i P
2014 2 $73.28 10% $200.00
2015 3 $46.56
2016 4 $19.84

Summery:
This question has three part. All of them are explain below:
(a) Since there is no spreadsheet function to directly display present worth for a gradient series, enter
the cash flows in a sequence of cells (rows or columns) and use the NPV function to find present
worth. In present worth terms, the planned series will exceed the equivalent of $200 M in 2012 by
approximately $7.5 M.
(b) Apply the PMT function to obtain the same AT =$ 65.471 per year. For this we required number
of year (n) and the interest rate and the present value which we have calculated in part (a).
(c) The Goal Seek tool is described in Appendix A. It is an excellent tool to apply when one cell
entry must equal a specific value and only one other cell can change. This is the case here; the
NPV function must equal $200, and the gradient G is unknown. This is the same as stating
PT =200 in Equation and solving for G. When OK is clicked, the solution is displayed;
G=$−26.721. This means that if the investment is decreased by a constant annual amount of
$26.721 M, the equivalent total present worth invested over the 4 years will be exactly $200 M.
 EXAMPLE 2.12 The Cement Factory Case
Now let us go back to the proposed Houston American Cement plant in Georgia. The revenue series
estimate of $50 million annually is quite optimistic, especially since there are many other cement product
plants operating in Florida and Georgia on the same limestone deposit. (The website for the HAC plant
shows where they are located currently; keen competition will be present.) Therefore, it is important to be
sensitive in our analysis to possibly declining and increasing revenue series, depending upon the longer-
term success of the plant’s marketing, quality, and reputation. Assume that revenue may start at $50
million by the end of the first year, but then decreases geometrically by 12% per year through year 5.
Determine the present worth and future worth equivalents of all revenues during this 5-year time frame
at the same rate used previously, that is, 10% per year.
Solution:
A1 ( 1−g )n−1=50 M (1−0.12)5 – 1=50(0.88)4 =$ 29.98 M

n g A1 A1(1-g)n-1
5 12% $50 29.985

(a) First, we determine Pg in year 0 with i=0.10 and g=−0.12,

0.88 5
Pg =50 [ 1.10 ( )
1−

0.10−(−0.12) ]
¿ 50[3.0560]
¿ $ 152.80

n i g A1 1+g 1+i Pg
5 10% -12% $50 88% 110% $152.80

(b) we calculate F in year 5.

F=152.80( F /P , 10 % ,5)=152.80(1.6105)
¿ $ 246.08

n i Pg F
5 10% $152.80 ($246.09)

Summery:
This problem is related to the geometric gradient. This question has two parts. Now I explain both:
(a) In this we calculated the Pg =$ 152.80. For this we used the excel sheet and put the formula for
the present worth. First revenue starts at the $50M. its value is continuously decrease
geometrically by 12% every year in equal ratio.
(b) In this we calculated the future worth which is equal to the $246.09M. If we compare it with the
previous explain in which the future worth is $305.255M for uniformly revenue series of 5 years.
In conclusion, the 12% declining geometric gradient has lowered the future worth of revenue by
$59.175 M, which is a sizable amount from the perspective of the owners of Votorantim
Cimentos North America, Inc.

EXAMPLE 2.15 The Cement Factory Case

From the introductory comments about the HAC plant, the annual revenue is planned to be $50 million.
All analysis thus far has taken place at 10% per year; however, the parent company has made it clear that
its other international plants are able to show a 20% per year return on the initial investment. Determine
the number of years required to generate 10%, 15%, and 20% per year returns on the $200 million
investment at the Georgia site.
Solution:
If hand solution is utilized, the present worth relation can be established, and the n values interpolated in
the tables for each of the three rate of return values.
P=−200=50(P / A , i % , n),(i=10 % , 15 % , 20 %)
By using this formula, we calculate the value of “n”.

P A i year
($200) $50 10% 5
($200) $50 15% 7
($200) $50 20% 9

Summery:
In this problem we must calculate the number of years. This can be done easily by the spread sheet. This
is a good opportunity to utilize a spreadsheet and repeated NPER functions since several i values are
involved. the single cell ¿ NPER(i % , 50 ,−200) function for each rate of return. In this the value of i
change from 10% to 20%. First value of i=10 % for this the number of years is 5. Second value of
i=15 % f0r this the number of years is 7.Third value of i=15 % f0r this the number of years is 9.
 EXAMPLE 5.2 Water for Semiconductor Manufacturing Case
As discussed in the introduction to this chapter, ultrapure water (UPW) is an expensive commodity for the
semiconductor industry. With the options of seawater or groundwater sources, it is a good idea to
determine if one system is more economical than the other. Use a MARR of 12% per year and the present
worth method to select one of the systems.
Solution:
An important first calculation is the cost of UPW per year. The general relation and estimated costs for
the two options are as follows:
$ cost ∈$
UPW cost relation: = (
year 1000 gallons )( gallons minutes hours days
minute )( hour )( day )( year )
Seawater: ( 4/1000)(1500)(60)( 16)(250)=$ 1.44 M per year
Groundwater: (5/1000)(1500)(60)(16)(250)=$ 1.80 M per year
Calculate the PW at i=12 % per year and select the option with the lower cost (larger PW value). In $1
million units:
PW relation: PW = first cost - PW of AOC - PW of UPW + PW of salvage value
PW S =−20−0.5(P/ A , 12% ,10)−1.44( P/ A , 12 % , 10)+ 0.05(20)( P/F , 12% ,10)
¿−20−0.5(5.6502)−1.44(5.6502)+ 1(0.3220)
¿ $−30.64
first cost= -20
PW of
n i A AOC
10 12% 0.5 ($2.83)

PW of
n i A UPW
10 12% 1.44 ($8.14)

PW of
salvage
n i F value
10 12% 1 ($0.32)

PWS ($30.64)

PW G=−22−0.3(P / A ,12 % , 10)−1.80( P / A , 12 % , 10)+ 0.10(22)(P / F , 12% ,10)

¿−22−0.3( 5.6502)−1.80 (5.6502)+2.2(0.3220)
¿ $−33.16
first cost= -22
PW of
n i A AOC
10 12% 0.3 ($1.70)

PW of
n i A UPW
10 12% 1.8 ($10.17)

PW of
salvage
n i F value
10 12% 2.2 ($0.71)

PWS ($33.16)

Summery:
In this problem we must compare the present worth for two project one is for the sea water project and the
other project is the ground water project. For the sea water project first, we calculate the present worth of
AOC which is equal to the $2.83. Then in second step we calculate the present worth of UPW which is
equal to the $8.14. Then in third step we calculate the present worth of salvage value which is equal to the
$0.32. Then we calculate the present worth for the seawater project which is equal to $30.64. Similarly,
we repeated the whole step to calculate the present worth of ground water project which is equal to the
$33.16.
Based on this present worth analysis, the seawater option is cheaper by $2.52 M.

EXAMPLE 5.4 Water for Semiconductor Manufacturing Case

When we discussed this case in the introduction, we learned that the initial estimates of equipment life
were 10 years for both options of UPW (ultrapure water)—seawater and groundwater. As you might
guess, a little research indicates that seawater is more corrosive, and the equipment life is shorter—5
years rather than 10. However, it is expected that, instead of complete replacement, a total refurbishment
of the equipment for $10 M after 5 years will extend the life through the anticipated 10th year of service.
With all other estimates remaining the same, it is important to determine if this 50% reduction in expected
usable life and the refurbishment expense may alter the decision to go with the seawater option, as
determined in Example 5.2. For a complete analysis, consider both a 10-year and a 5-year option for the
expected use of the equipment, regardless of the source of UPW.
Solution:
LCM of 10 years: In the top part of the spreadsheet, the LCM of 10 years is necessary to satisfy the
equal-service requirement; however, the first cost in year 5 is the refurbishment cost of $-10 M, not the $-
20 M expended in year 0. Each year’s cash flow is entered in consecutive cells; the $-11.94 M in year 5
accounts for the continuing AOC and annual UPW cost of $-1.94 M, plus the $-10 M refurbishment cost.
The NPV functions shown on the spreadsheet determine the 12% per year PW values in $1 million units.
PW S =$−36.31
PW G=$−33.16
Seawate
Source Groundwater
r
Equipment
1st cost, -20 -22
$M
AOC, $
-0.5 -0.3
per year
Salvage
value, % of 5 10
1st cost 1 2.2
UPW
-1.44 -1.8
cost/year

Seawate
Year r Ground water
0 -20 -22
1 -1.94 -2.1
2 -1.94 -2.1
3 -1.94 -2.1
4 -1.94 -2.1
5 -1.94 -2.1
6 -1.94 -2.1
7 -1.94 -2.1
8 -1.94 -2.1
9 -1.94 -2.1
10 -0.94 0.1

PW= -30.639 -33.157

PW($ M) ($30.64) ($33.16)

Now, the groundwater option is cheaper ; the economic decision is reversed with this new estimate of life
and year 5 refurbishment expense.
Study period of 5 years: PW analysis using the second approach to evaluating different-life alternatives,
that is, a specific study period, which is 5 years in this case study. Therefore, all cash flows after 5 years
are neglected.
Again, the economic decision is reversed as the 12% per year PW values favor the seawater option.
PW S =$−26.43
PW G=$−28.32
Seawate
Year r Ground water
0 -20 -22
1 -1.94 -2.1
2 -1.94 -2.1
3 -1.94 -2.1
4 -1.94 -2.1
5 -0.94 0.1

PW= -26.43 -28.32

PW ($ M) ($26.43) ($28.32)

Summery:
The decision switched between the LCM and study period approaches. Both are correct answers given the
decision of how the equal-service requirement is met. This analysis demonstrates how important it is to
compare mutually exclusive alternatives over time periods that are believable and to take the time
necessary to make the most accurate cost, life, and MARR estimates when the evaluation is performed.
If the PW evaluation is incorrectly performed using the respective lives of the two options, the equal-
service requirement is violated, and PW values favor the shorter-lived option, that is, seawater. The PW
values are
Option S: n= 5 years, PW S =$−26.43 M ,
Option G: n= 10 years, PW G=$−33.16 M ,

EXAMPLE 5.7 Water for Semiconductor Manufacturing Case

Our case study has progressed (in Example 5.4) to the point that the life of the seawater option can be
extended to 10 years with a major refurbishment cost after 5 years. This extension is possible only one
time, after which a new life cycle would commence. In $1 million units, the estimates and PW values are
as follows:
Seawater: PS =$−20 ; AOC S =$−1.94 ; n S=10 years ; refurbishment , year 5=$−10;
SS =0.05(20)=$ 1.00 ; PW S =$ 36.31
Groundwater: PG =$−22 ; AOC G =$−2.10; n G=10 years ; S G=0.10(22)=$ 2.2;
PW G=$−33.16
If we assume that the UPW (ultrapure water) requirement will continue for the foreseeable future, a good
number to know is the present worth of the long-term options at the selected MARR of 12% per year.
What are these capitalized costs for the two options using the estimates made thus far?
Solution:
Seawater: A S=PW S ( A / P ,12 % ,10)=−36.31( 0.17698)=$−6.43
CC S=−6.43 /0.12=$−53.58

n i PW A CCS
10 12% 36.31 ($6.43) ($53.55)

Groundwater: AG =PW G ( A /P , 12 % , 10)=−33.16(0.17698)=$−5.87

CC G =−5.87 /0.12=$−48.91
n i PW A CCG
10 12% 33.16 ($5.87) ($48.91)
Summery:
Find the equivalent A value for each option over its respective life, then determine the CC value using the
relation CC =A /i. Select the option with the lower CC. This approach satisfies the equal-service
requirement because the time horizon is infinity when the CC is determined. In terms of capitalized cost,
the groundwater alternative is cheaper.

EXAMPLE 9.1 Water Treatment Facility #3 Case

The situation with the location and construction of the new WTF3 and associated transmission mains
described in the chapter’s introduction has reached a serious level because of recent questions posed by
some city council members and citizen groups. Before going public to the city council with the analysis
performed last year, the director of Allen Water Utilities has asked an engineering management
consultant to review it and determine if it was an acceptable analysis and correct economic decision, then
and now. The lead consultant, Joel Whiterson, took engineering economy as a part of his B.S. education
and has previously worked on economic studies in the government sector, but never as the lead person.
Within the first hour of checking background notes, Joel found several initial estimates (shown below)
from last year for expected consequences if WTF3 were built. He realized that no viewpoint of the study
was defined, and, in fact, the estimates were never classified as costs, benefis, or disbenefits. He did
determine that disbenefits were considered at some point in the analysis, though the estimates for them are
very sketchy. Joel defined two viewpoints: a citizen of Allen and the Allen Water Utilities budget. He
wants to identify each of the estimates as a cost, benefit, or disbenefit from each viewpoint. Please help
with this classification.

Economic Dimension:

1. Cost of water: 10% annual increase to Allen households

2. Bonds: Annual debt service at 3% per year on $540 million
3. Use of land: Payment to Parks and Recreation for shaft sites and construction areas
4. Property values: Loss in value, sales price, and property taxes
5. Water sales: Increases in sales to surrounding communities
6. M&O: Annual maintenance and operations costs
7. Peak load purchases: Savings in purchases of treated water from secondary sources

Monetary Estimate:

1. Average of $ 27.9million (years 1–5, steady thereafter)

2. $16.2 million (years 1–19); $516.2 million (year 20)
3. $300,000 (years 1–4)
4. $4 million (years 1–5)
5. $5 million (year 4) plus 5% per year (years 5–20)
6. $300,000 plus 4% per year increase (years 1–20)
7. $500,000 (years 5–20)

Solution:
The perspective of each viewpoint is identified and estimates are classified. (How this classification is
done will vary depending upon who does the analysis. This solution offers only one logical answer.)

Viewpoint 1: Citizen of the city of Allen. Goal: Maximize the quality of life and wellness of citizens with
family and neighborhood as prime concerns.

Costs: 1, 2, 4, 6 Benefits: 5, 7 Disbenefits: 3

Viewpoint 2: Allen Water Utilities budget. Goal: Ensure the budget is balanced and of sufficient size to
fund rapidly growing city service demands.
 Costs: 2, 3, 6 Benefits: 1, 5, 7 Disbenefits: 4

Citizens view costs in a different light than a city budget employee does. For example, the loss of
property values (item 4) is considered a real cost to a citizen but is an unfortunate disbenefit from the city
budget perspective. Similarly, the Allen Water Utilities budget interprets estimate 3 (payment for use of
land to Parks and Recreation) as a real cost; but a citizen might interpret this as merely a movement of
funds between two municipal budgets—therefore, it is a disbenefit, not a real cost.

Summery:
The consideration of disbenefits can without much of a stretch change the financial choice.
Notwithstanding, concession to the disbenefits and their money related appraisals is difficult (to difficult)
to grow, frequently bringing about the avoidance of any disbenefit from the monetary investigation.
Sadly, this normally moves the thought of disbenefit to the noneconomic (i.e., political) domain of public
venture dynamic.

EXAMPLE 9.5 Water Treatment Facility #3 Case

As our case unfolds, the consultant, Joel Whiterson, has pieced together some of the B/C analysis
estimates for the 84-inch Jolleyville transmission main study completed last year. The two options for
constructing this main were open trench (OT) for the entire 6.8-mile distance or a combination of
trenching and bore tunneling (TT) for a shorter route of 6.3 miles. One of the two options had to be
selected to transport approximately 300 million gallons per day (gpd) of treated water from the new
WTF3 to an existing aboveground reservoir.

The general manager of Allen Water Utilities has stated publicly several times that the trench-tunnel
combination option was selected over the open-trench alternative based on analysis of both quantitative
and nonquantitative data. He stated the equivalent annual costs in an internal e-mail some months ago,
based on the expected construction periods of 24 and 36 months, respectively, as equivalent to

AWOT = $1.20 million per year

AWTT = $2.37 million per year

This analysis indicated that the open-trench option was economically better, at that time. The planning
horizon for the transmission mains is 50 years; this is a reasonable study period, Joel concluded. Use the
estimates below that Joel has unearthed to perform a correct incremental B/C analysis and comment on
the results. The interest (discount) rate is 3% per year, compounded annually, and 1 mile is 5280 feet.
Solution:
PW OT =PW of construction+ PW of construction support costs

¿ 700(6.8)(5280)+250,000(12)(P/ A ,3 % ,2)

¿ $ 30,873,300

n i PW of C PW of CSC PWOT
$30,873,209.0
2 3% 25132800 $5,740,409.09 9

AWOT=30,873,300( A/P ,3%,50)

= $1.20 million per year

n i P AWOT
50 3% $30,873,209.09 $1,199,902.54

PWTT¿ [700(2.0)+2100(4.3)](5280)+ 175,000(12)( P / A , 3 % ,3)

¿ $ 61,010,460

n i PW of CC PW of CSC PWTT
$61,010,483.8
3 3% 55070400 $5,940,083.85 5

AWTT= 61,010,460( A /P , 3 % , 50)

¿ $ 2.37 million per year

n i P AWTT
50 3% $61,010,483.85 $2,371,202.62

The trench-tunnel (TT) alternative has a larger equivalent cost; it must be justified against the OT
alternative. The incremental cost is

∆ C = AWTT - AWOT = 2.37 − 1.20

= $1.17 million per year

The difference between ancillary expenses defines the incremental benefit for TT.
 PWOT-ans¿ 310,000(12)(P/ A ,3 % , 2)

¿ $ 7,118,220

n i A PWOT-anc
2 3% -3720000 $7,118,107.27

AW OT −ans=7,118,220 ( A /P , 3 % , 50)

¿ $ 276,685 per year

PW TT −ans =85,000(12)( P/ A ,3 % ,3)

¿ $ 2,885,172

n i A PWTT-anc
3 3% -1020000 $2,885,183.58

AW TT −ans =2,885,172( A/ P , 3 % , 50)

¿ $ 112,147 per year

n i AWOT-ans AWTT-ans
50 3% $276,648.76 $112,134.09

∆ B=AW OT−ans − AW TT −ans =276,685−112,147

¿ $ 164,538 per year ( $ 0.16 million)

Calculate the incremental B/C ratio

∆ B/ ∆C=0.16/1.17=0.14

C B B/C
$1,171,300.0 $164,514.6
8 7 0.14045476

Summery:
One of the options should be chosen, and the development lives are inconsistent. Since it isn't sensible to
accept that this development undertaking will be rehashed numerous cycles later, it is wrong to direct an
AW examination over the individual consummation times of 24 and three years, or the LCM of these time
spans. Be that as it may, the examination time of 50 years is a sensible assessment time span since the
mains are viewed as perpetual establishments. We can expect that the development first costs are a
current worth incentive in year 0. PW and 50-year AW of other month to month costs should be resolved.
∆B
Since ≪1.0 , the trench-tunnel option is not economically justified. Joel can now conclude that the
∆C
general manager’s earlier comment that the TT option was selected based on quantitative and
nonquantitative data must have had heavy dependence on nonquantitative information not yet discovered.

EXAMPLE 9.7 Water Treatment Facility #3 Case

Land for Water Treatment Facility #3 was initially purchased in the year 2010 for $19.3 million;
however, when it was publicized, influential people around Allen spoke strongly against the location. We
will call this location 1. Some of the plant design had already been completed when the general manager
announced that this site was not the best choice anyway, and that it would be sold and a different, better
site (location 2) would be purchased for $28.5 million. This was well over the budget amount of $22.0
million previously set for land acquisition. As it turns out, there was a third site (location 3) available for
$35.0 million that was never seriously considered.
In his review and after much resistance from Allen Water Utilities staff, the consultant, Joel, received a
copy of the estimated costs and benefits for the three plant location options. The revenues, savings, and
sale of bulk water rights to other communities are estimated as increments from a base amount for all
three locations. Using the assumption of a very long life for the WTF3 facility and the established
discount rate of 3% per year, determine what Joel discovered when he did the B/C analysis. Was the
general manager correct in concluding that location 2 was the best, all said and done?
Solution:
Source Location 1 Location 2 Location 3
Land cost,
19.3 28.5 35
$M
Facility 1st
460 446 446
cost, $M
Benefits, $
per year:
Pumping
5 3 0
cost saving
sales to area
communitie 12 10 8
s
 Added
revenue 6 6 6
from Allen
Total
benefits, $ 23 19 14
per year

Location 1:
AW of costs=A of land cost+ A of facility fi rst cost
¿(19.3+ 460.0)(0.03)
¿ $ 14.379 per year
Land cost FFC i AW1
19.3 460 3% 14.379

Location 2:
AW of costs=$ 14.235
Land cost FFC i AW2
28.5 446 3% 14.235

Location 3:
AW of costs=$ 14.430
Land cost FFC i AW3
35 446 3% 14.43

Analysis Location 1 Location 2 Location 3

AW of cost 14.379 14.235 14.43
Benefits 23 19 14
B/C 1.5996 1.3347 0.9702
Acceptance Yes Yes No

Comparison 1-to-2 Eliminated

∆C, $/year 0.144
∆B, $/year 4
∆B/∆C 27.78
Increment
Yes
Justification
Selection Location 1
Summery:
A spreadsheet can be very useful when performing an incremental B/C analysis of three or more
alternatives. Presents the analysis with the preliminary input of AW values for costs using the relation
A=P(i) and annual benefits. Logical IF statements indicate alternative elimination and selection
decisions. This is genuine with changed names and qualities. Area 1 was at first bought also, anticipated
WTF3. Be that as it may, the presence of political, network, and ecological stress factors changed the
choice to area 2, at the end of the day.