Thanks. And can we just found the Cost for each alternatives and then find the difference between Cost and Benefits? I obtained Alternative A the bigger defference
@@nicolevalverde1775it’s actually faster to convert to the annual worth like how I showed it. This is because the annual O&M and benefits are annual costs, so it leaves us to convert the present first cost to annual worth to make everything match up. Note, this incremental method takes time but it’s required for more than 2 alternatives when doing a Cost-Benefit analysis.
For each alternative, compute the future value for the benefits and the future value for the costs and divide them. You will get a B/C of 1.13, 1.10, and 1.09 for options 1, 2, and 3 respectively. Option 1 has the greatest B/C so you should go with that one. You will have to use (F/A, 10%, 20) and (F/P, 10%, 20)
Thanks for the video. I would suggest to covert the first cost to annual cost for all 3 options and then calculate the total cost yearly. Then calculate the B/C for each option individually and just select the higher ratio. Your thoughts?
Hi Sam, sorry for the late reply. Unfortunately, that does not work in this case since all the alternatives are equally justifiable since all have a B/C ratio that greater than 1 (B/C>1). Note, if one alternative had a B/C < 1 you can quickly eliminate and focus on analyzing the other alternatives using the incremental method. The incremental method is conducted as follows: (1) Determine the equivalent total cost for each alternative (PW or AW) (2) Order alternatives by increasing total cost (3) Identify benefits (B) and (D) for each alternative (4) Calculate B/C for each alternative and eliminate all with B / C1.0, higher-cost alternative becomes defender (7) Repeat steps 5 and 6 until only one alternative remains
@@directhubfeexam Your method works fine. My point was that when calculating the B/C for each alternative, the greatest value for B/C will be best alternative.
@@samhashemi9031 Unfortunately, an alternative or project with the highest benefit-cost ratio may not always be the preferred alternative. This is why we do this method (I have no idea how it's developed lol - but it works).
When using modified vs conventional B/C there is always some slight difference in answer. What if one of them gave me answer less than 1 and the other gave me answer equal to 1.
Logically, since they are both very close to 1 - they are both equally justified if you are doing a real life analysis by taking other consideration in mind that do not include cost. What kind of project or scenario is this? Government project, private project, etc?
Since the annual maintenance and operation costs and benefits are given per year I believe it would be easier to go to annual value (/year) from the present.
Hi, since the costs and benefits are per year, we would need to convert the first cost to a yearly value. This is called the concept of "equivalence". Basically, we need every cash flow to in units of PER YEAR. We know the first cost occurs at the present - therefore we can get an annual cost flow from the present by doing A/P. Meaning we are converting the to an annual cost flow from the current present first cost. Hope this helps!
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Thanks. And can we just found the Cost for each alternatives and then find the difference between Cost and Benefits? I obtained Alternative A the bigger defference
Really good explanation butt he process is lil long. Converting everything to PW and comparing might be the fastest way for FE.
Yeah good insight, never thought of that to be honest, good work 👍👍
Could you please explain how did you do that? I tried, but couldn’t.
@@directhubfeexam Hey! Could you explain this? Thank you!
@@nicolevalverde1775it’s actually faster to convert to the annual worth like how I showed it. This is because the annual O&M and benefits are annual costs, so it leaves us to convert the present first cost to annual worth to make everything match up.
Note, this incremental method takes time but it’s required for more than 2 alternatives when doing a Cost-Benefit analysis.
Is there any shortest way for FE please?
For each alternative, compute the future value for the benefits and the future value for the costs and divide them. You will get a B/C of 1.13, 1.10, and 1.09 for options 1, 2, and 3 respectively. Option 1 has the greatest B/C so you should go with that one. You will have to use (F/A, 10%, 20) and (F/P, 10%, 20)
Thanks for the video. I would suggest to covert the first cost to annual cost for all 3 options and then calculate the total cost yearly. Then calculate the B/C for each option individually and just select the higher ratio. Your thoughts?
Hi Sam, sorry for the late reply. Unfortunately, that does not work in this case since all the alternatives are equally justifiable since all have a B/C ratio that greater than 1 (B/C>1). Note, if one alternative had a B/C < 1 you can quickly eliminate and focus on analyzing the other alternatives using the incremental method.
The incremental method is conducted as follows:
(1) Determine the equivalent total cost for each alternative (PW or AW)
(2) Order alternatives by increasing total cost
(3) Identify benefits (B) and (D) for each alternative
(4) Calculate B/C for each alternative and eliminate all with B / C1.0, higher-cost alternative becomes defender
(7) Repeat steps 5 and 6 until only one alternative remains
@@directhubfeexam Your method works fine. My point was that when calculating the B/C for each alternative, the greatest value for B/C will be best alternative.
@@samhashemi9031 Unfortunately, an alternative or project with the highest benefit-cost ratio may not always be the preferred alternative. This is why we do this method (I have no idea how it's developed lol - but it works).
When using modified vs conventional B/C there is always some slight difference in answer. What if one of them gave me answer less than 1 and the other gave me answer equal to 1.
Logically, since they are both very close to 1 - they are both equally justified if you are doing a real life analysis by taking other consideration in mind that do not include cost.
What kind of project or scenario is this? Government project, private project, etc?
Why didn't you use NPV formula i think it would be much easier
Since the annual maintenance and operation costs and benefits are given per year I believe it would be easier to go to annual value (/year) from the present.
How did you know it was A/P?
Hi, since the costs and benefits are per year, we would need to convert the first cost to a yearly value. This is called the concept of "equivalence". Basically, we need every cash flow to in units of PER YEAR. We know the first cost occurs at the present - therefore we can get an annual cost flow from the present by doing A/P. Meaning we are converting the to an annual cost flow from the current present first cost. Hope this helps!
I think It can be solved in a much simpler way, just by bringing Yearly costs into present worth and then deduct initial cost..
@@zohansyfe3836 Good point, that works too!
@@zohansyfe3836 Could you please explain how did you do that?