Alternative A 0,000,000 Dhs 000,000 Dhs/year Alternative Alternatives Constructi

Question

Alternative A 0,000,000 Dhs 000,000 Dhs/year Alternative Alternatives Construction (Initial cost) Operations & Maintenance 8,000,000 Dhs r-- - 500,000 Diwyear costs Benefits to the Community Dis-Benefits 500,000 Dhs/year 000,000 Dhs/year 2,000,000 Dhs/year 500,000 ear Assume the Life Expectancy of Both buildings is 15 years and the MARR is 8% per year a Calculate the B/C ratio for alternative A b Calculate the B/C ratio for alternative B c. Do the incremental B/C analysis d Choose the best alternative A. 1.15 B 1.05 C 1.36 D Alternative A E 1.51 F 1.71 G 0.93 H Altemative B : A the B C ratio for alternative A the B/C ratio for alternative B Cthe incremental B C tatio DSelected Alternative

Explanation / Answer

ANSWER:

I = 8% AND N = 15 YEARS

A) BENEFIT OF ALTERNATIVE A = BENEFITS OF THE COMMUNITY - DIS BENEFITS = 3,500,000(P/A,8%,15) - 1,000,000(P/A,8%,15) = 3,500,000 * 8.559 - 1,000,000 * 8.559 = 29,956,500 - 8,559,000 = 21,937,500

COST OF ALTERNATIVE A = INITIAL COST + OPERATION AND MAINTENANCE

COST OF ALTERNATIVE A = 10,000,000 + 1,000,000(P/A,8%,15) = 10,000,000 + 1,000,000 * 8.559 = 10,000,000 + 8,559,000 = 18,559,000

B/C RATIO OF ALTERNATIVE A = 21,937,500 / 18,559,000 = 1.15

B) BENEFIT OF ALTERNATIVE B = BENEFITS OF THE COMMUNITY - DIS BENEFITS = 2,000,000(P/A,8%,15) - 500,000(P/A,8%,15) = 2,000,000 * 8.559 - 500,000 * 8.559 = 17,118,000 - 4,279,500 = 12,838,500

COST OF ALTERNATIVE B = INITIAL COST + OPERATION AND MAINTENANCE

COST OF ALTERNATIVE B = 8,000,000 + 500,000(P/A,8%,15) = 8,000,000 + 500,000 * 8.559 = 8,000,000 + 4,279,500 = 12,279,500

B/C RATIO OF ALTERNATIVE B = 12,838,500 / 12,279,500 = 1.045 OR 1.05 APPROX.

C) IN THE INCREMENTAL B/C RATIO WE SUBTRACT THE LOWER INITIAL COST ALTERNATIVE FROM THE HIGHER INITIAL COST ALTERNATIVE AND HERE THE HIGHER INITIAL COST IS OF ALTERNATIVE A.

BENEFIT OF (A-B) = BENEFITS OF THE COMMUNITY - DIS BENEFITS = ( 3,500,000 - 2,000,000) - ( 1,000,000 - 500,000) = 1,500,000(P/A,8%,15) - 500,000(P/A,8%,15) = 1,500,000 * 8.559 + 500,000 * 8.559 = 8.559 ( 1,500,000 - 500,000) = 8.559 * 1,000,000 = 8,559,000

COST OF (A-B) = INITIAL COST + OPERATION AND MAINTENANCE = (10,000,000 - 8,000,000) + (1,000,000 - 500,000) = 2,000,000 + 500,000(P/A,8%,15) = 2,000,000 + 500,000 * 8.559 = 2,000,000 + 4,279,500 = 6,279,500

THE INCREMENTAL B/C RATIO = 8,559,000 / 6,279,500 = 1.36

D) WE SELECT ALTERNATIVE A AS THE B/C RATIO OF A IS MORE THEN B/C RATIO OF B.

1.15 > 1.05

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