Part 2: (30 Marks) Q8: (15Marks) The city of Abu Dhabi, U.A.E has recieved two d
ID: 2786106 • Letter: P
Question
Part 2: (30 Marks) Q8: (15Marks) The city of Abu Dhabi, U.A.E has recieved two designs for a new wing to the muncipal hospital. The costs and benefits are same in most of the categories, but the city inancial manager decided that the following estimates should be considered to determine which design to recommend at the city council meeting next week. Design 1 10,000,000 Design 2 15,000,000 55,000 Construction Cost,$ Building Maintenanc 35,000 e Cost, S/Year Patient 800,000 1,050,000 Benefits S/Year The patient benefit is an estimate of the amount paid by an insurance carrier, not th patient, to occupy the hospital room with features included in the design of each roor The discount rate is 5% per year, and the life of the addition is estimated at 30 year. Calculate: A. The annual worth of cost of Design 1 (3 Marks) B. The annual worth of cost of Design 2 (3 Marks) Apply the incremental B/C procedure with no disbenifits included and direct benefits esimate and calculate: C. Incremental B/C ratio for Design -1 (3 Marks) D. Incremental B/C ratio for Design -2 (3 Marks) E. Which design is selected? (3 Marks)Explanation / Answer
Calculation of Annual Net worth of Design 1 & 2
Design 1
Year
Cashflow
Present value factor or Present value annuity factor
Amount
1
$ 1,00,00,000.00
$ 1.00
$ 1,00,00,000.00
1 to 30
$ 35,000.00
$ 15.37
$ 5,38,035.79
1 to 30
$ 8,00,000.00
$ 15.37
$ 1,22,97,960.82
Annual worth cost
$ 17,59,925.04
Design 2
1
$ 1,50,00,000.00
$ 1.00
$ 1,50,00,000.00
1 to 30
$ 55,000.00
$ 15.37
$ 8,45,484.81
1 to 30
$ 10,50,000.00
$ 15.37
$ 1,61,41,073.58
Annual worth cost
$ 2,95,588.77
Design 1
Design 2
Incremental ( 2 to 1)
Incremental ( 1 to 2)
Present value of Benefits
$ 1,22,97,960.82
$ 1,61,41,073.58
$ 38,43,112.76
$ -38,43,112.76
Present value of Costs Incurred
$ 1,05,38,035.79
$ 1,58,45,484.81
$ 53,07,449.02
$ -53,07,449.02
Incremental Benefit cost ratio
1.167006933
1.018654448
0.724097913
0.724097913
Incremental Benefit cost ratio for Both Designs 1 & 2 will come same as the we are comparing both of them for the Two Designs
and further I have calculated the Benefit cost ratio Individually fir the both of the Designs
If the Incremental B/C Ratio is less than 1.0 it is not good to choose the option with high cost and benefits , in the present case it was Design 2
If we compare the B/c Ratios individually for both Designs , it was higher for the Design 1 and Lower for Design 2
So that we can come to a Conclusion that Design 1 should be Beneficial and it should be selected
The annual Worth of cost of Design 1
$ 17,59,925.04
The annual Worth of cost of Design 2
$ 2,95,588.77
The Incremental B/C Ratio for Design 1
0.724
The Incremental B/C Ratio for Design 2
0.724
The Design 1 Should be Selected
Calculation of Annual Net worth of Design 1 & 2
Design 1
Year
Cashflow
Present value factor or Present value annuity factor
Amount
1
$ 1,00,00,000.00
$ 1.00
$ 1,00,00,000.00
1 to 30
$ 35,000.00
$ 15.37
$ 5,38,035.79
1 to 30
$ 8,00,000.00
$ 15.37
$ 1,22,97,960.82
Annual worth cost
$ 17,59,925.04
Design 2
1
$ 1,50,00,000.00
$ 1.00
$ 1,50,00,000.00
1 to 30
$ 55,000.00
$ 15.37
$ 8,45,484.81
1 to 30
$ 10,50,000.00
$ 15.37
$ 1,61,41,073.58
Annual worth cost
$ 2,95,588.77
Design 1
Design 2
Incremental ( 2 to 1)
Incremental ( 1 to 2)
Present value of Benefits
$ 1,22,97,960.82
$ 1,61,41,073.58
$ 38,43,112.76
$ -38,43,112.76
Present value of Costs Incurred
$ 1,05,38,035.79
$ 1,58,45,484.81
$ 53,07,449.02
$ -53,07,449.02
Incremental Benefit cost ratio
1.167006933
1.018654448
0.724097913
0.724097913
Incremental Benefit cost ratio for Both Designs 1 & 2 will come same as the we are comparing both of them for the Two Designs
and further I have calculated the Benefit cost ratio Individually fir the both of the Designs
If the Incremental B/C Ratio is less than 1.0 it is not good to choose the option with high cost and benefits , in the present case it was Design 2
If we compare the B/c Ratios individually for both Designs , it was higher for the Design 1 and Lower for Design 2
So that we can come to a Conclusion that Design 1 should be Beneficial and it should be selected
The annual Worth of cost of Design 1
$ 17,59,925.04
The annual Worth of cost of Design 2
$ 2,95,588.77
The Incremental B/C Ratio for Design 1
0.724
The Incremental B/C Ratio for Design 2
0.724
The Design 1 Should be Selected
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