The benefit/cost method is used primarily to evaluate projects and to select from alternatives in the public sector. The incremental B/C ratio must be greater than or equal to 1.0 for the incremental equivalent total cost to be economically justified. The PW, AW, or FW of the initial costs and estimated benefits can be used to perform an incremental B/C analysis. If alternative lives are unequal, the AW values should be used, provided the assumption of project repetition is not unreasonable. Public sector economics are substantially different from those of the private sector. For public sector projects, the initial costs are usually large, the expected life is long (25, 35, or more years), and the sources for capital are usually a combination of taxes levied on the citizenry, user fees, bond issues, and private lenders. It is very difficult to make accurate estimates of benefits for a public sector project. The politics of the public sector—citizen hearings, special-interest groups, regulations, elections, congressional rulings, the bond referendum process, and many more—make the alternative selection criteria much less defined than for the private sector. The interest rates, called the discount rates in the public sector, are lower than those for corporate capital financing. Although the discount rate is as important to establish as the MARR, it can be difficult to establish, because various government agencies qualify for different rates. Standardized discount rates are established for some federal agencies by the OMB (Office of Management and Budget). |
2002 McGraw-Hill Higher Education