Question

Consider the following financial data:

	Project A	Project B
Initial Cost	$11531	$18817
Annual Benefit	$1490	$4888
Annual Maintenance Costs	$629	$1703
Project Life	10 years	15 years

Using a MARR of 8%, what is the benefit-cost (B/C) ratio for project A?

Answer 1

ANSWER:

NPV OF BENEFITS = AMOUNT(P/A,I,N)

AMOUNT = $1490

I = 8%

N = 10 YEARS

NPV OF BENEFITS = 1490(P/A,8%,10) = 1490 * 6.71 = $9,997.90

NPV OF COSTS = INITIAL COST + ANNUAL MAINTENANCE COSTS(P/A,I,N)

INITIAL COST = 11,531

ANNUAL MAINTENANCE COST = $629

I = 8%

N = 10 YEARS

NPV OF COSTS = INITIAL COST + ANNUAL MAINTENANCE COSTS(P/A,I,N)

NPV OF COSTS = 11,531 + 629(P/A,8%,10)

NPV OF COSTS = 11,531 + 629 * 6.71 = 11,531 + 4220.59 = $15,751.59

BENEFIT / COST RATIO = NPV OF BENEFITS / NPV OF COSTS = $9997.9 / $15,751.59 = 0.63