--- title: "Financial vs economic analysis; both BCR" subject: "Engineering Economics" chapter: 3 key: "semester_6/engineering_economics:financial-vs-economic-bcr-300000" source: https://www.bctengineer.com/q/semester_6/engineering_economics/financial-vs-economic-bcr-300000 site: BCT Engineering --- # Financial vs economic analysis; both BCR Engineering Economics · Chapter 3: Basic Methodologies of Engineering Economic Analysis - Asked in: 2070 Magh, 2+4 marks - Video: [Unit:5 | Cost/Benefit Ratio | B/C Ratio | BCRM ratio | Engineering Economics | Prashant YT | BECivil](https://www.youtube.com/watch?v=OyKEBsyVnpM) — Prashant YT - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_6/engineering_economics/financial-vs-economic-bcr-300000 - Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-3 ## Question What is the difference between financial and economic analysis? Determine both types of B/C ratio from the following cash flow. Initial investment = 3,00,000 Annual revenue = 85,000 Annual costs = 15,000 Salvage value = 20% of initial investment Useful life = 6 years MARR = 10% ## Short answer Financial analysis uses market prices and owner viewpoint; economic analysis uses shadow prices and society viewpoint, including externalities. With MARR=10%, 6-year life, conventional B/C=1.12, modified B/C=1.15 (both >1, acceptable). ## Answer #### Financial vs economic analysis | Basis | Financial analysis | Economic analysis | |---|---|---| | Viewpoint | Owner / investor / firm | Society / nation as a whole | | Measures | Cash revenues and costs actually paid or received | All benefits and costs to society, even if not paid in cash | | Prices | Market prices | Shadow (economic) prices | | Taxes, subsidies | Included as real cash flows | Treated as transfers and excluded | | Externalities | Ignored | Included (pollution, employment, foreign exchange) | | Interest rate | Company MARR / cost of capital | Social discount rate | | Aim | Profit and financial viability | Net contribution to national welfare | #### Numerical (PW formulation, i = 10%, n = 6) - Salvage S = 20% × 3,00,000 = Rs 60,000 - Factors: (P/A, 10%, 6) = 4.3553; (P/F, 10%, 6) = 0.5645 ```text yr 0: -3,00,000 yr 1..6: +85,000 revenue, -15,000 cost yr 6: +60,000 ``` - PW(B) = 85,000 × 4.3553 = Rs 370,197 - PW(C: O&M) = 15,000 × 4.3553 = Rs 65,329 - PW(S) = 60,000 × 0.5645 = Rs 33,868 **Conventional B/C** = PW(B) / [I + PW(C) − PW(S)] = 370,197 / (3,00,000 + 65,329 − 33,868) = 370,197 / 331,460 = **1.117** **Modified B/C** = [PW(B) − PW(C)] / [I − PW(S)] = (370,197 − 65,329) / (3,00,000 − 33,868) = 304,868 / 266,132 = **1.146** **Answer: conventional B/C = 1.12 and modified B/C = 1.15. Both are greater than 1, so the project is acceptable.** ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. Whose viewpoint does economic analysis take? A. The owner only B. Society or nation as a whole C. The bank D. The tax office Answer: B. Financial analysis is from the owner's viewpoint. (Key point: Viewpoint) 2. How are taxes and subsidies treated in economic analysis? A. As transfers, excluded B. As real cash flows C. As benefits D. As salvage Answer: A. They are real cash flows in financial analysis but transfers in economic analysis. (Key point: Taxes) 3. What is salvage value here? A. Rs 20,000 B. Rs 3,00,000 C. Rs 60,000 (20% of 3,00,000) D. Rs 15,000 Answer: C. 0.20 x 3,00,000 = 60,000. (Key point: Salvage value) 4. What are the conventional and modified B/C? A. 1.15 and 1.12, reject B. 0.89 and 0.87, reject C. 1.12 and 1.15, reject D. 1.12 and 1.15, both above 1, accept Answer: D. 370,197/331,460 = 1.117 and 304,868/266,132 = 1.146. 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