Federal Electricity & Water Authority (FEWA) has two renewal energy alternatives
ID: 2793957 • Letter: F
Question
Federal Electricity & Water Authority (FEWA) has two renewal energy alternatives are available for providing energy at a remote government research facility. The cash flow estimates associated with each alternative are given below. Use the conventional B-C ratio method, with Annual Worth as the equivalent-worth measure, to determine which alternative should be selected at an interest rate of 10% per year over a 25-year study period. One alternative must be selected.
Alternative I
Alternative II
Initial cost, $
$1,000,000
$990,000
Annual maintenance costs, $/yr
$380,000
$359,500
Annual benefits, $/yr
$500,000
$459,500
Salvage value, $
$17,000
$15,800
Benefit Cost ratio for Alternative 1:
Benefit Cost ratio for Alternative II:
Incremental Benefit Cost Ratio
Alternative selected
1.02
1.06
0.231
Alternative I
Alternative II
1.60
1.20
0.30
Alternative I
Alternative II
Initial cost, $
$1,000,000
$990,000
Annual maintenance costs, $/yr
$380,000
$359,500
Annual benefits, $/yr
$500,000
$459,500
Salvage value, $
$17,000
$15,800
Explanation / Answer
Federal Electricity & Water Authority Cash Flow estimates associated with each alternative are given below: Alternative I Alternative II Initial cost, $ $1,000,000 $990,000 Annual maintenance costs, $/yr $380,000 $359,500 Annual benefits, $/yr $500,000 $459,500 Salvage value, $ $17,000 $15,800 Determine Alternative Interest rate 10% Period 25 years Conventional B-C ratio: B-C ratio = AW(B) CR+AW(O&M) CR $1,017,000 = $500,000 $1,017,000(A/P,10%,25)+$380,000 = 500000 NPV($1,017,000,10%,25)+$3,80,000 = 380,000 NPV$1,000,000, 10%,25 years 93865 CR+AW(O&M) 473,865 = 1.06 Benefit Cost ratio for Alternative 1: 1.06 Option B Conventional B-C ratio: B-C ratio = AW(B) CR+AW(O&M) = $459,500 $1,005800(A/P,10%,25)+$359,500 CR 1005800 = $459,500 NPV($1,005800,10%,25)+$359,500 = 359,500 NPV$1,000,000, 10%,25 years 92831 CR+AW(O&M) 452331 = 1.02 Benefit Cost ratio for Alternative 2: 1.02 Option A Incremental ratio Alternative Benefit 1 B1 $46,148.00 NPV($500,000) Alternative Benefit 2 B2 $42,410.01 NPV($459,500) CR+AW(O&M) Alternative cost 1 C1 1033503.447 $1000,000+ NPV($380,000)-NPV($17,000) Alternative Cost 2 C2 1,021,722 990000+NPV(359,500)-NPV($15,800) B2- B1 -3737.99 C2-C1 -11,781 Incremental Benefit cost ratio Option H 0.3 Option H Alternative selected Alternative 1 has better ratio that’s is more than 1 Alternative 1 has 1.06 > Alternative 2has 1.02
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