Yupi company is considering investing in Project A or Project B. Project A gener
ID: 1106803 • Letter: Y
Question
Yupi company is considering investing in Project A or Project B. Project A generates the following cash flows: year "zero"-308 dollars (outflow); year 1-261 dollars (inflow); year 2 = 264 dollars (inflow); year 3 375 dollars (inflow); year 4 - 148 dollars (inflow). Project B generates the following cash flows: year “zero" = 230 dollars (outflow); year 1-120 dollars (inflow); year 2-100 dollars (inflow); year 3 = 200 dollars (inflow); year 4-120 dollars (inflow). The MARR is 12 %. Compute the Benefit/Cost ratio of the BEST project. (note: round your answer to two decimal places, and do not include spaces, currency signs, plus or minus signs, or commas)Explanation / Answer
Answer-
To find out benefit/cost ratio we first calculate net present value of cash flow of both project A and project B as:
Project A
Year
Cash flow
MARR (12%)
(Discount Cash flow)
Benefits
costs
0
-308
-308
308
1
261
233
233
2
264
210
210
3
375
267
267
4
148
94
94
Total
496
804
308
The benefit to cost ratio can be calculated by dividing benefit by cost = 804/308 = 2.61
Project B
Year
Cash flow
MARR (12%)
(Discount Cash flow)
Benefits
costs
0
-230
-230
230
1
120
107
107
2
100
80
80
3
200
142
142
4
120
76
76
Total
175
405
230
The benefit to cost ratio can be calculated by dividing benefit by cost = 405/230= 1.76
Thus, Project A is the best project and Yupi company is considering investing in project A. Because project A benefit/cost ratio is greater that Project B benefit/cost ratio. The greater value of benefit cost ratio is greater satisfactory in economically
Year
Cash flow
MARR (12%)
(Discount Cash flow)
Benefits
costs
0
-308
-308
308
1
261
233
233
2
264
210
210
3
375
267
267
4
148
94
94
Total
496
804
308
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