Question

As part of the rehabilitation of the downtown area of a southern U.S. city, the Parks and Recreation Department expects to develop the space below several overpasses into basketball, handball, miniature golf, and tennis courts. The estimates are initial cost of $184,000; life of 20 years and, annual M&O cost of $24,000. The. department expects 22,000 people per year to use the facilities an average of 2 hours each. The value of the recreation has been conservatively set at $0.9 per hour. At a discount rate of 8% per year, What is the B/C ratio for the project?

Answer 1

B/C ratio of the project= 0.92

B/ C ratio<1[ not acceptable]

Calculations------

Benefit cost Ratio= Present value of inflows / present value of outflows

Given-----

Initial cost(outflow)=$184000
life(n)=20 years

Annual M&O cost( outflow) = $24000

Annual inflows=22000*2*0.9=$39600

present value of an annuity of $1 @8% for 20 years=9.818(Annuity table value)

# CALCULATING P.V OF INFLOWS

Annual inflows= 22000*2*0.9=$39600
Discounted value of inflows= 39600* 9.818=$388793
# CALCULATING PRESENT VALUE OF OUTFLOWS

* p.v of Initial cost=184000*1=$184000
* p.v of annual M&O= 24000* 9.818=$235632
P.v of total outflows= 184000+235632=$419632
B/c ratio= 388793/419632=0.92

As B/c ratio <1
so,project is rejected.