Question

The estimated annual cash flows for a proposed municipal government project are costs of $840,000 per year, benefits of $950,000 per year, and disbenefits of $270,000 per year. Calculate the conventional B/C ratio at an interest rate of 11% per year, and determine if it is economically justified.

The B/C ratio is  .

The project is economically  (Click to select)  justified , not justified

Answer 1

Answer:

The B/C ratio is 0.8095

The project is economically not justified.

Explanation:

The cost of the project per year = $ 840,000

The benefits of the project per year = $ 950,000

The disbenefits of the project per year = $ 270,000

So the net benefits of the project per year = Benefits per year - Disbenefits per year

= $ 950,000 - $ 270,000

= $ 680,000

B/C ratio = Benefits / Costs

= $ 680,000 / $ 840,000

= .8095

Since the B/C ratio is less than one ( .8095 < 1), the project is economically not justified.