6. Cataño City is considering the purchase of a new ambulance. The appropriate d

Question

6. Cataño City is considering the purchase of a new ambulance. The appropriate data t ambulance A and B are as follow Ambulance $70,000 $65,000 5,000 Capital Investment Benefitslyr (Patient Care) MARRI: 8% Use this information to answer the following questions: Maintenance Costiyr Useful life 6,000 10 years $25,000 10 years $20,000 AW Benefis AW Cos a. b. c. What is the conventional Benefit Cost Ratio for Ambulance A? What is the conventional Benefit Cost Ratio for Ambulance A? Which ambulance should be purchase?

Explanation / Answer

(a)

Estimating Conventional Benefit Cost Ratio for Ambulance A -

Benefits per year = $20,000

So,

AWBenefits = $20,000

Capital investment = $65,000

Maintenance cost per year = $5,000

Useful life = 10 years

MARR = 8%

AWCosts = $65,000(A/P, 8%, 10) + $5,000 = ($65,000 * 0.14903) + $5,000 = $9,686.95 + $5,000 = $14,686.95

Calculate the Conventional Benefit Cost Ratio -

Conventional B/C Ratio = AWBenefits/AWCosts = $20,000/$14,686.95 = 1.36

Thus,

The conventional benefit cost ratio for Ambulance A is 1.36

(b)

Estimating Conventional Benefit Cost Ratio for Ambulance B -

Benefits per year = $25,000

So,

AWBenefits = $25,000

Capital investment = $70,000

Maintenance cost per year = $6,000

Useful life = 10 years

MARR = 8%

AWCosts = $70,000(A/P, 8%, 10) + $6,000 = ($70,000 * 0.14903) + $6,000 = $10,432.10 + $6,000 = $16,432.10

Calculate the Conventional Benefit Cost Ratio -

Conventional B/C Ratio = AWBenefits/AWCosts = $25,000/$16,432.10 = 1.52

Thus,

The conventional benefit cost ratio for Ambulance B is 1.56

(c)

The conventional benefit cost ratio for Ambulance B is greater.

So,

Ambulance B should be purchased.

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