2) Three independent projects are available for a secret government agency. The

Question

2) Three independent projects are available for a secret government agency. The estimated costs associated with each alternative are given below. Use the conventional B-C ratio method to determine which alternative(s), if any, should be selected at an interest rate of 7% per year. Assume a project life of 20 years and a B-C ratio of at least 1 for evaluation. Project A Project B Project C Initial cost, $ $1,300,000 $1,200,000 $1,450,000 Annual benefits, $/year $490,000 $450,000 $535,000 Annual disbenefits, $/year $310,000 $280,000 $345,000

Explanation / Answer

Net annual beneffit for A = 490,000-310,000 = 180,000

PV of net benefit = 180,000*PVIFA(7%,20) = 180,000*10.5940 = $1906920

B/C = 1906920/1300000 =1.466

Net annual beneffit for B = 450,000-280,000 = 170,000

PV of net benefit = 170,000*PVIFA(7%,20) = 170,000*10.5940 = $1800980

B/C = 1800980/1200000 =1.5 (Highest)

Net annual beneffit for C = 535,000-345,000 = 190,000

PV of net benefit = 190,000*PVIFA(7%,20) = 190,000*10.5940 = $2012860

B/C = 2012860/1450000 =1.388

Project B should be chosen

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