Problem 4 (Incremental ROR A company is considering the projects shown below, al

Question

Problem 4 (Incremental ROR A company is considering the projects shown below, all of which can be considered to last forever If the company MARR is 18% per year, use rate-of-return analysis to determine which should be selected a) If the alternatives are independent, and b) If the alternatives are mutually exclusive. 20000 4000 First cost -10000 -15000 70000 Annual income 2000 2950 10000 Problem 5 (B/C Analvsis) a) Three mutually exclusive highway bridge projects are under consideration by a governmental agency. Which of three bridges, if any, should be recommended to the governmental agency? Use incremental B/C analysis, an interest rte of 10% per year, compounded annually, and a life of 20 years. Compare alternative on the basis of annual worth (A W) and state which project is finally selected Project 1Project 2 950,000,000 400,000 Project3 825,000,000 715,000 990,000,000 Initial cost Annual O & M cost (S/vr) Annual Benefits (S/yr) 110,000,000 I Annual Disbenefit (Siyr) 350,000 500 350,000 120,000,000 20 99,000,000 850,000 20 Life (vear) 20 b) Assuming that you are an engineer who is performing the above analysis for a company whose client is the governmental agency, how could the result of your analysis impact public policy making or public planning? (Hint read ch. 9)

Explanation / Answer

Answer a) For infinite lives , P= A / i

Then ROR for A :- 2000 / i * = 10000 or i = 0.2 i.e 20%

Similarly,for B , i * = 20% , for C i = 19.6% , for D = i = 14.3%

Since MARR is 18% ,we select A, B and C.

b) Since D have i < MARR ,we do not have to consider them for further calculations. Ordering A,B , C in increasing costs:-

A B C

First Cost -10000 -15000 -20000

Annual Income 2000 2950 4000

We have already determined that i * for A is greater than MARR . This means it is better than Do Nothing .After stating this fact,proceed to compare A and C incrementally.

A VS DN :- Select A as alraedy shown that i * > MARR

C-A :- 0= -5000+ 950 / Delta i * or Delta i = 0.19 ( 19 % which is greater than MARR )

Therefore ,eliminate A and select C

B-C :- 0= -5000 + 1150 / Delta i* or Delta i* = 0.23 ( 23% which is greater than MARR)

Therefore, eliminate C and Select B.

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