Dubai Ministry of Health is considering setting up a new division to develop can

Question

Dubai Ministry of Health is considering setting up a new division to develop cancer drugs. It expects to pay 120 million Dhs for set up costs of its new division to day and 6 million dhs operating costs each year for the next 12 years. It estimates that the new division will be able to provide benefits of 278 million Dhs at the end of year 12. Alternatively it could use this money to support its diabetes combat program in that case it would spend 16 million Dhs per year and provide benefits of 18 million per year. Assuming a minimum acceptable rate of return is 14% per year and the project life is 12 years; a) Calculate the Benefits/Cost ratio for the new division

Explanation / Answer

Investment 1: We need to find the present value of the expenditures that are to take place in the years to come PV = - 120 - (P/A 6, 14%, 12) (present value of annuity of operating cash flows for 12 years ) + (P/V 278, 14%, 12) PV = -120 - 33.96 +57.70 PV of the entire new division =- 96.26 Benefit from the new division = 23.74 Benefit/cost ratio for new division = 23.74/120 = 0.19

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