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NON-PROFIT MOTIVE IN PUBLIC
Benefit-Cost
Analysis
Enmar T. Tuazon, ECE, ECT
FINANCING OF PUBLIC PROJECTS
• With the exception of self-liquidating projects, the
basic source of capital needed to finance public
projects is taxes. It is reasonable to expect that
public funds obtained from taxes should be
invested with a financial efficiency at least equal to
that which a private person would earn with those
funds.
Benefit-Cost Ratio (B/C) Method
• The comparative worth of highway projects is
expressed by the ratio of annual benefits which
happen to the owners. When the project involves
disadvantages to the owners, these are called
disbenefits. Costs are the anticipated expenditures
for construction, maintenance, operation, and
other costs. For public projects, it is convenient to
think of the public as the owners, and the national
government as the one which incurs the costs.
ECONOMY
In general, most private organizations and corporations exist for
profit. The principal motive of economy studies for private projects
is the maximizing of profits. Analysis of several alternatives is made
to determine which one will contribute the maximum net profit. No
expenditure is justified unless it can be considered as an acceptable
investment. On the other hand, government or public organizations
spend money to create an advantage for the public or a segment of
it. For example, the benefits to be derived from the construction of
a highway may consist of savings in time consumed because of
higher speeds, in reduction of accidents because the highway is
built in accordance with highway standards, in lesser maintenance
and repair costs of vehicles because the surface is smooth, and in
shorter distances because the route is direct. Likewise,
expenditures for other projects like bridges, waterworks, dams,
airports, libraries, schools, flood controls, and all other public works
projects cause benefits to the people. The basic purpose of
government organizations is to provide a benefit needed by people.
Comparison of Costs and Benefits
1. Net Present Value (NPV)
2. Rate of Return Method (ROR) – Internal/External
3. Benefit-Cost Ratio (B/C)
4. The B – C Criterion
Benefit-Cost Ratio (B/C) Method
• When quantifying the B/C ratio, the analyst must
know that benefits include all the advantages,
minus the disadvantages, to the users, and that
costs mean all the expenditures, minus any savings,
that will be incurred by the government. A plan
with many valuable benefits may also include some
inescapable disadvantages to the user, in which
case they must be regarded as negative benefits
and subtracted.
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Benefit-Cost Ratio (B/C) Method
𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 − 𝐷𝑖𝑠𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠
𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 − 𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑜𝑠𝑡𝑠
𝐴𝑛𝑛𝑢𝑎𝑙 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑓𝑟𝑜𝑚
𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡𝑠
𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 − 𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑜𝑠𝑡𝑠 𝑜𝑓
𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡𝑠
The B – C Criterion
As mentioned before,
B = net benefits = all the advantages, less the
disadvantages to the user.
C = net costs = all disbursements, less any savings to
the investor.
Sample Problem 1
To increase accessibility to some beautiful scenery
along the Pan-Philippine Highway, a new highway is
being pro-posed for construction. The initial cost is
expected to be P9,600,000, with an annual
maintenance cost of P36,000. Every three years,
minor improvements costing P20,000 are expected
to be made. It is estimated that income from tourists
from foreign countries will be P1,200,000 annually.
Using a planning horizon of 30 years and interest rate
of 10%, determine if the highway should be
constructed. Analyze by (a) the (B - C) criterion, and
(b) the B/C method.
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Benefit-Cost Ratio (B/C) Method
• The procedure for a benefit-cost economy study,
like that for a rate-of-return solution, involves two
sets of computations. First, the benefit-cost ratios
for each alternative are found, and those plans that
fail to attain a B/C ratio of unity are rejected. Next,
the B/C ratio for each increment of added in-
vestment is computed, each plan being compared
against the preceding acceptable plan. The
alternative that reaches the prescribed B/C ratio
(usually 1.0) on both the total and increment of
investment is the most acceptable on the basis of
the assumed interest rate.
The B – C Criterion
For a project to be acceptable, the difference (B - C)
between the net benefits and net costs must be
positive, that is, the benefits must exceed the costs.
It is obvious that if BCC, then the project should not
be implemented.
Where several alternatives are to be compared by
this criterion, the quantity (B - C) is calculated for
each alternative, and the one with the maximum
value is selected.
Sample Problem 2
A government project has the following estimates:
• Annual benefits P500,000
• Annual disbenefits 450,000
• Annual costs 350,000
• Annual savings 340,000
a. Calculate the B/C ratio.
b. Mistakenly treating disbenefits as costs and
savings as benefits, determine the B/C ratio.
c. Calculate (B - C)
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Sample Problem 3
• A nonprofit educational research organization, is con-
templating an investment of P1,500,000 in grants to
develop new ways to teach people the rudiments of
profession. The grants would extend over a ten-year
period and would achieve an estimated benefit of
P500,000 per year in professors` salaries, student
tuition, and other expenses. The program would be an
addition to ongoing and planned activities, thus an
estimated P100,000 a year would have to be released
from other program to support the educational
research as disbenefit. Interest of 15% is expected. Is
this a good program?
a. B/C method
b. B – C Criterion