Two plans have been proposed for a high speed passenger rail line between Cincin

Question

Two plans have been proposed for a high speed passenger rail line between Cincinnati and Cleveland. The plans are summarized in the table below. Costs and benefits are in millions of dollars. Use benefit-cost ratio analysis with an interest rate of 10% Use increment analysis, Use Net Present Worth and Annual Worth to determine which, if either, of the plans should be accepted. Compare between Net Present Worth and Annual Worth in the analysis of benefit-cost ratio.

Explanation / Answer

Plan A Plan B initial cost ($ million) 300 160 annual net benefits 20 19 (benefits - O&M) salvage value 15 12 life in years 40 20 pvifa @ 10% 9.7791 8.5136 pvif @ 10% 0.0221 0.1486 pv of annual benefits 20*9.7791 195.58 19*8.5136 161.76 pv of salvage value: 15*0.0221 0.33 12*0.1486 1.78 total pv of inflows 195.91 163.54 Benefit cost ratio: 195.91/300 0.65 163.54/160 1.02 Net present worth: $ million 195.91-300 -104.09 163.54-160 3.54 Annual Worth: $ million (-104.09/9.7791) -10.64 3.54/8.5136 0.42 Plan B should be accepted as it has +ve NPV and Benefit cost ration > 1. It has positive annual worth of 0.42 $ million. Benefit cost ratio has to be 1 of more than 1 for a project to be accepted. B/C will be more than 1, if NPV is positive and annual worth is positive.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.