Four Different independent building locations have been suggested, of which only

Question

Four Different independent building locations have been suggested, of which only one will be selected. See table for detail data. Apply incrementel B/C ratio analysis to select the best alternative. The MARR is 6%. Which is the best alternative?

                                                A                          B                         C                          D

Initial Building Cost       $-200,000               $-250,000             $-180,000            $-290,000

Annual cash flow              +22,000                  +35,000               +19,500             +42,000

Life in years                            25                         25                         25                      25

*Step by Step Details

Explanation / Answer

MARR = 6%

Present value interest rate factor for annual Cash flows =[(1+i)n - 1] / [i * (1+i)n]

i = 0.06; n = 25 for all four projects

Present value interest rate factor = [(1+0.06)25 - 1] / [0.06 * (1+0.06)25] = 12.783

Project A = PV for cash flows = Annual cash flow * PV int rate factor

                                                = 22000 * 12.783 = $281233.84

Initial building cost = -$200000

B/C ratio = PV(Annual cash flows)/Investment = 281233.84/200000 = 1.406

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Project B = PV for cash flows = Annual cash flow * PV int rate factor

                                                = 35000 * 12.783 = $447417.5

Initial building cost = -$250000

B/C ratio = PV(Annual cash flows)/Investment = 447417.5/250000 = 1.79

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Project C = PV for cash flows = Annual cash flow * PV int rate factor

                                                = 19500 * 12.783 = $249275.44

Initial building cost = -$180000

B/C ratio = PV(Annual cash flows)/Investment =249275.44/180000 = 1.385

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Project D = PV for cash flows = Annual cash flow * PV int rate factor

                                                = 42000 * 12.783 = $536900.9

Initial building cost = -$290,000

B/C ratio = PV(Annual cash flows)/Investment = 536900.9/290000 = 1.85

We see that project D has the highest B/C ratio and hence it is the best alternative

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