Question

16-22a Chungyang Dam is being constructed across the Hungshui River in southern China. The dam will produce electricity to serve over 500,000 people in the region. The initial cost is 3.7 billion yuan and annual operating costs are 39.2 million yuan. A major overhaul of the electric generation facilities estimated to cost 650 million yuan will occur at the end of Year 25. The dam and generating plant have no salvage value, but must be torn down and removed at the end of Year 50 for 175 million yuan. Ishan Electric has a MARR of 10%.

(a)     What annual benefit in yuan is needed for a B/C ratio of 1?

Answer 1

Useful life = 50 years, at end of which cost of disposal = 175 million Yuan

PW of costs (Yuan million) = 3,700 + 39.2 x P/A(10%, 50) + 650 x P/F(10%, 25) + 175 x P/F(10%, 50)

= 3,700 + 39.2 x 9.9148 + 650 x 0.0923 + 175 x 0.0085

= 3,700 + 388.66 + 60 + 1.49

= 4,150.15

B/C ratio = PW of benefits / PW of costs

When B/C ratio = 1,

PW of benefits = PW of costs

If annual benefit be B yuan million, then

B x P/A(10%, 50) = 4,150.15

B x 9.9148 = 4,150.15

B = 418.58 Yuan million