Given the net cash flow for two machines as shown below, what is the benefit cos

Question

Given the net cash flow for two machines as shown below, what is the benefit cost ratio for the difference in the benefits and costs for the higher initial cost machine and the lower initial cost machine if the MARR is 12%?

1.78

1.56

1.34

1.14

Machine A Machine B Years CF Costs CF Benefits CF Costs CF Benefits 0 ($67,000) $0 ($121,000) $0 1 ($17,600) $65,000 ($15,200) $48,600 2 ($72,458) $65,000 ($15,656) $48,600 3 ($18,672) $65,000 ($16,126) $48,600 4 ($76,871) $65,000 ($16,609) $48,600 5 ($19,809) $65,000 ($17,108) $48,600 6 ($1,551) $65,000 $4,159 $48,600

Explanation / Answer

Calculation of Benefit cost ratios for both machines :

1. Machine - A

Benefit cost ratio = 1,19,611.694 / 67,000 = 1.785

Machine - B

Benefit cost ratio = 1,39,937.883 / 121000 =1.1565

So the cost benefit ratios are 1.78 & 1.14

Year Costs Benefit Net benefit Present value PV of benefit 1 17,600 65000 47400 0.893 42328.20 2 72,458 65000 -7458 0.797 -5944.026 3 18,672 65000 46328 0.712 32985.536 4 76,871 65000 -11871 0.636 -7549.956 5 19,809 65000 45191 0.567 25623.297 6 1,551 65000 63449 0.507 32168.643 1,19,611.694

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