A library shelving system has a first cost of $20,000 and a useful life of 10 ye

Question

A library shelving system has a first cost of $20,000 and a useful life of 10 years. The annual maintenance is expected to be $3,500. The annual benefits to the library staff are expected to be $9,000. If the effective annual interest rate is 10 percent, what is the benefit/cost ratio of the shelving system? Should the library invest in the shelving system?

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Explanation / Answer

Cost of Machine = $20000 Annual Benefits = $9000 Annual Cost = $ 3500 Net Annual Cash Flow = $5500 (9000-3500$) P. V of Cash Inflow = Annual Cash Inflow * Sum of PVF of 10% for 10 yr = $5500*6.144567 = 33795.12 $ benefit/cost ratio of the shelving system = P.V of Cash Inflow / Cost of Machine = 33795.12/20000 $ = 1.689756 Library should invest in the shelving system because benefit/cost ration is more than 1

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