A transportation engineer is considering the purchase of a large dynamic sign fo
ID: 1090824 • Letter: A
Question
A transportation engineer is considering the purchase of a large dynamic sign for the intelligent highway system. Data from two sign manufacturers are given below. With an assumed interest rate of 10%, from which company should the engineer purchase the sign? Base your recommendation upon a benefit-cost analysis.
Company
Cost, $
UAB, $
Life, Years
Salvage, $
A
10,000
3,000
5
0
B
12,000
3,100
5
0
Company
Cost, $
UAB, $
Life, Years
Salvage, $
A
10,000
3,000
5
0
B
12,000
3,100
5
0
Explanation / Answer
Benefit/Cost Analysis is done using following formula = P.V. of Benefits / P.V. of Costs
Benefit/Cost Analysis of Option A = ($3,000 x Annuity P.V. factor of 10% for 5 years) / $10,000
= ($3,000 x 3.7908) / $10,000
= $11,372.40 / $10,000
= 1.1372 or 1.13
Benefit/Cost Analysis of Option B = ($3,100 x Annuity P.V. factor of 10% for 5 years) / $12,000
= ($3,100 x 3.7908) / $12,000
= $11,751.48 / $12,000
= 0.9793 or 0.98
Conclusion: Purchase should be done from Company A because its Benefit/Cost ratio is more than one. (Answer)
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