You are asked questions about 5 mutually exclusive candidates described as follo

Question

You are asked questions about 5 mutually exclusive candidates described as follows (all quantities are in

thousands):

Candidate 1: Present worth of costs = $1,000; Present worth of benefits = $8,000

Candidate 2: Present worth of costs = $4,000; Present worth of benefits = $8,000

Candidate 3: Present worth of costs = $4,000; Present worth of benefits = $14,000

Candidate 4: Present worth of costs = $10,000; Present worth of benefits = $ 16,000

Candidate 5: Present worth of costs = $12,000; Present worth of benefits = $ 24,000

(a) Which system has the largest B/C ratio and should it be selected without further study or not? Explain.

(b) Which system shows the largest incremental B/C ratio based on differences between alternatives?

(c) Which system would you recommend and why?

Explanation / Answer

a)

Candidate 1 has the largest B/C ratio but it should not be selected without further study because it does not say anything about the return. The investment is very less

b)

Candidate 5  shows the largest incremental B/C ratio

c) Candidate 5 should be selected because based on incremental B/C ratio analysis, it justifies greater investment

Candidate 1 Candidate 2 Candidate 3 Candidate 4 Candidate 5 Cost 1000 4000 4000 10000 12000 Benefit 8000 8000 14000 16000 24000 B/C ratio 8 2 3.5 1.6 2

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